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

Bonds could be volatile for the next week. Increasing yields could make it difficult for major tech and other growth stocks to get to grips with.

Rising bond yields were a challenge for growth stocks. Names like Apple, Tesla and Amazon are lagging behind as investors shift to cyclical groups that are thriving in an economic recovery. Still, the S&P 500 and Dow both closed at record highs on Friday, while the Nasdaq Composite was lower.

Home to major tech, the Nasdaq gained as much as 3% in the past week, but is down 5.5% in the last month.

The bond market in the coming week is likely to follow signals from the Federal Reserve, which meets Tuesday and Wednesday.

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

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

He said Fed Chairman Jerome Powell is likely to sound subdued and unlikely to provide timeframes for the central bank to change its bond buying program or other policy.

Bond yields, moving at price, have risen based on an improving outlook for the economy.

That trade surfaced in the stock market as well, with the Dow up 4% for the week to finish Friday at a record 32,778. Consumer goods, including retail, were among the top performers, up 5.7%, fueled by optimism that individuals will spend their $ 1,400 incentive vouchers.

Yields were higher Friday after President Joe Biden said all adults would be eligible for a vaccine by May 1. The Treasury’s 10-year yield peaked at 1.642% – the highest level in more than a year.

It’s the most important rate to keep an eye on as it affects mortgages and other consumer and business loans.

“The economy will be incredibly strong this year – spending deficit, reopening, vaccines,” said Peters of PGIM.

“It looks like all figures will be revised higher for next year,” he said. “So this thing could have some sustainable growth, so I think there’s going to be pressure on the interest rate hike.”

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

In the past month, energy stocks are up almost 20%, financial stocks are up 10.2% and industry and services are up 7%. The S&P technology sector is down 5.4% in the past month and communications services, including Internet names, are up 0.8%.

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

“When rates are very low, the valuations don’t matter to people,” said Peter Boockvar, Chief Investment Officer at Bleakley Global Advisors.

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

Scott Redler, partner of T3live.com, follows short term trading techniques and trades many of the growth stocks. Lately, however, he found himself in many value names and cyclical names.

“The names I’m in – Visa, GM, Ford, Macy’s, 3M. Those are my biggest winners this week,” he said. “It’s really hard to make money with Apple, Facebook and Tesla.”

The Nasdaq has been hit hardest by the hike in interest rates. Apple fell 0.3% in the past week, but 10.6% in the past month. The S&P 500 ended at a record high of 3,943 and was up 2.6% over the past week, but is flat over the past month, up only 0.2%.

“Rate volatility could trigger another technology tipping point,” Redler said. “Technology hit its reactionary low last week, and this [past] week it had an oversold bounce. The question is, “Was that it?” ‘

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

Apple’s booth is unusual for the techie. It contributed to the rise of the market last year.

“Look at Apple, because it’s a little bit of everything. Apple is growth, technology, retail. If all goes well, it should be Apple,” said Redler.

There is some key data for the coming week, including retail sales in February and industrial production, both on Tuesday. There is also an auction of 20-year-old $ 24 billion treasury notes on Tuesday.

The biggest catalyst for the bond market remains the Fed.

The bond market is speculating on something the Fed may not discuss after its Wednesday afternoon meeting. In one of its actions to support the economy during the pandemic, the Fed allowed banks to hold government bonds without deducting them from the bank’s leverage ratio. This strategy gave institutions more flexibility to use their balance sheets for activities such as lending.

The program ends on March 31.

“This is essentially a huge problem because so many treasury stocks are coming and being restored [the rule] in fact makes it very punitive for banks to own Treasurys, ”said Peters of PGIM.

“The markets are quite divided on what is going to happen,” he said. “I think most experts believe an extension is the way to go. You haven’t heard from the Fed on this issue.”

Peters expects the Treasury market to remain volatile.

“I think you’ll see more volatility in a high-pressure economy with extremely large deficits and an accommodative Fed,” he said. “I think you’re going to see those sultry moves.”

Monday

8:30 am Empire State Production

4:00 p.m. Treasury International Capital data

Tuesday

Merits: Volkswagen, Designer Brands, Jabil, Lennar, Coupa Software, CrowdStrike

Federal Open Markets Committee Begins Two-Day Meeting

8:30 am Retail

8:30 am Import prices

8.30 am Survey of business leaders

9.15 am Industrial production

10:00 a.m. Company inventories

10:00 a.m. survey from the National Association of Home Builders

Wednesday

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

8.30 am Housing starts

2:00 pm Fed statement

2:30 pm Briefing from Fed Chairman Jerome Powell

Thursday

Merits: FedEx, Dollar General, Nike, Petco, Accenture, Commercial Metals, Signet Jewelers

8:30 am Initial claims

10:00 am Philadelphia Fed survey