The Fed could be a catalyst for bonds and that could boost growth in stocks in the next week.


Traders on the floor of the New York Stock Exchange

Source: NYSE

Bonds could be volatile in the next week. If returns go up, that could make it harder for big tech companies and other growth stocks to gain traction.

Rising bond yields have been a challenge for growth stocks. Names like Apple, Tesla and Amazon have lagged behind as investors move into cyclical groups that are doing well in an economic recovery. Still, the S&P 500 and Dow closed at record highs on Friday, while the Nasdaq Composite fell.

The Nasdaq, home of great technology, gained 3% last week, but is down 5.5% in the last month.

Next week’s bond market will likely follow the lead of the Federal Reserve, which meets on Tuesday and Wednesday.

The central bank is expected to give a nod to much better growth. Bond professionals are also watching whether Fed officials will modify their outlook on interest rates, which now does not include any rate hikes until 2023.

Fed ahead

“Markets have too high expectations of what the Fed is going to do or say,” said Gregory Peters, head of strategy and multi-industry at PGIM Fixed Income. “I think the message will be consistent.”

He said Fed Chairman Jerome Powell is likely to sound dovish and is unlikely to give a time frame on when the central bank will change its bond buying program or other policy.

Bond yields, which move in the opposite direction to price, have risen due to the improved outlook for the economy.

That trade was also shown in the stock market, with the Dow rising 4% during the week ending Friday at a record 32,778. Consumer discretionary stocks, which include retail, were among the top performers, up 5.7%, driven by optimism that people will spend their $ 1,400 stimulus checks.

Yields were higher on Friday after President Joe Biden said that all adults would be eligible for a vaccine on May 1. The 10-year Treasury yield peaked at 1,642%, its highest level in more than a year.

It is the key rate to consider, as it affects mortgages and other commercial and consumer loans.

“The economy is going to be incredibly strong this year – deficit spending, reopening, vaccines,” said PGIM’s Peters.

“It seems that for next year, all the figures are being revised upwards,” he said. “So this could have sustainable growth, so I think there will be pressure for rates to go up.”

Bond yields have risen sharply over the last month. The rapid pace of the move has made stocks nervous as investors adjust to higher rates. The 10-year Treasury yield was 1.16% on February 12.

Growth versus cyclicals

Over the past month, energy stocks have risen nearly 20%, financial stocks are up 10.2% and industrials are up 7%. S & P’s technology sector was down 5.4% over the past month and communications services, which include Internet names, were up 0.8%.

Higher rates are a challenge for tech stocks and other growth stocks because those stocks are expensive and have high price-to-earnings ratios.

“When rates are very low, valuations don’t matter to people,” said Peter Boockvar, chief investment officer at Bleakley Global Advisors.

“If the rates are low, there is no penalty,” he said. “If rates start to go up, people become much more sensitive to valuations, and that’s what we’ve seen here.”

Scott Redler, a partner at T3live.com, follows short-term stock market techniques and trades many of the growth stocks. Lately, however, it has found itself sitting on many value and cyclical names.

“The names I’m in: Visa, GM, Ford, Macy’s, 3M. Those have been my biggest winners this week,” he said. “It has been very difficult to make money on Apple, Facebook and Tesla.”

The Nasdaq has been the most affected by the increase in interest rates. Apple was down 0.3% last week, but 10.6% last month. The S&P 500 finished at a record 3,943 and was up 2.6% last week, but has been flat for the past month, just 0.2%.

“Rate volatility could cause another tipping point in technology,” Redler said. “Last week, technology reached its reactionary low point, and this [past] week had an oversold bounce. The question is, ‘Was that it?’ “

“Next Wednesday, Powell could be the determining factor,” he said. “Rates went higher and technology is a long way from last Friday’s lows, so maybe the market is getting more comfortable.”

Apple’s stagnation is unusual for the tech leader. Helped drive market earnings last year.

“Look at Apple because it is a bit of everything. Apple is growth, technology, retail. If something goes right, it should be Apple,” Redler said.

Bond volatility

There’s some big data for next week, including February retail sales and industrial production, both on Tuesday. There is also an auction of 20-year Treasury notes for $ 24 billion on Tuesday.

The bond market’s biggest catalyst continues to be the Fed.

The bond market has been speculating on something the Fed might not discuss after their meeting on Wednesday afternoon. In one of its measures to prop up the economy during the pandemic, the Fed allowed banks to hold Treasuries without counting them against the bank’s leverage ratio. This strategy allowed institutions to have more flexibility to use their balance for activities such as loans.

The program expires on March 31.

“This is a big problem basically because there is a lot of supply from the Treasury going in and resetting. [the rule] it basically makes it very punitive for banks to own Treasuries, “said PGIM’s Peters.

“The markets are somewhat divided on what is going to happen,” he said. “I think most experts believe that an extension is the right way to go. They haven’t heard anything from the Fed about it.”

Peters expects the Treasury market to remain volatile.

“I think you will see more volatility in a high pressure growth economy with extremely large deficits and an accommodative Fed,” he said. “I think you’re going to see these quick movements.”

Next week’s calendar

Monday

8:30 am Empire State Manufacturing

4:00 pm International capital data from the Treasury

Tuesday

Profits: Volkswagen, designer brands, Jabil, Lennar, Coupa Software, CrowdStrike

Federal Open Markets Committee begins two-day meeting

8:30 am Retail Sales

8:30 am Import prices

8:30 am Survey of business leaders

9:15 am Industrial production

10:00 am Commercial inventories

10:00 am Survey of the National Association of Home Builders

Wednesday

Profits: Cintas, Lands’ End, Five Below, Herman Miller, American Outdoor Brands

8:30 am Home of the house

2:00 pm Fed Account Statement

2:30 pm Briefing by Fed Chairman Jerome Powell

Thursday

Profits: FedEx, Dollar General, Nike, Petco, Accenture, Trade Metals, Signet Jewelers

8:30 am Initial claims

10:00 am Philadelphia Fed Survey

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