After a hectic February, investors are likely hoping that March will stay true to its proverb: in like a lion, out like a lamb.
February turned out to be a doozy indeed, with benchmark bond yields represented by 10-year treasury TMUBMUSD10Y,
and the 30-year long-term bond TMUBMUSD10Y,
according to Dow Jones Market Data, their biggest monthly spikes since 2016 have started.
The move strongly reminded investors that bonds, which are considered commonplace and straightforward by some investors, can still wreak havoc on the market.
A final trade storm, about $ 2.5 billion in sales by Friday’s close, put a major drag on stocks in the last few minutes of the session and could mean more bubbles may be in the offing before the market. will remain stable next week.
The Dow Jones Industrial Average DJIA,
and S&P 500 index SPX,
barely held above their 50-day moving average, at 30,863.07 and 3,808.40 respectively at Friday’s close.
An accompanying sell-off of 10-20% of US stocks would also attract attention. But before then, the pain currently being distributed to growth-focused equity portfolios could get worse. Citigroup strategists
“The turmoil is probably not over yet,” writes independent market analyst Stephen Todd, who leads Todd Market Forecast, in a daily note.
But despite all the stomach ache over higher than expected returns, stocks managed to deliver solid returns in February. For the month, the Dow ended 3.2%, the S&P 500 posted a 2.6% gain in February, while the Nasdaq posted a 0.9% return, despite a 4.9% weekly loss on Friday being the worst. weekly slip marked since October. .30.
Many have argued that a sell-off in the tech-heavy Nasdaq Composite was inevitable, especially with buzzy stocks like Tesla Inc. TSLA,
some measures only make it more frothy.
“But the market has been over-bought year-round and likely for several months by the end of 2020,” Jeff Hirsch, editor of the Stock Trader’s Almanac, wrote in a note on Thursday.
“After the great run-up in the first half of February, people were looking for an excuse to take a profit,” he wrote, describing February as the weak link in what is usually the best six-month period of profit for the stock market. .
The beneficiaries of the recent interest rate move so far appear to be banks, benefiting from a steeper yield curve as long-term government bond yields rise, and the S&P 500 financial sector SP500.40,
XLF,
finished with 0.4%, which, it turns out, is the second-best weekly performance of the 11 sectors of the index behind energy SP500.10,
which increased by 4.3%.
Utilities SP500.55,
were the worst performance, down 5.1% from the week and consumer discretionary SP500.25,
was the second worst, down 4.9%.
In February, energy was up 21.5% as crude oil prices rose, while financials rose 11.4% over the month, with the best and second best monthly performance.
So what’s in store for March?
“Typical March trade comes in like a lion and a lamb with force during the first few trading days, followed by choppy to lower trading until mid-month when the market tends to jump higher,” Hirsch writes.
March also sees “triple witching: takes place on the third Friday, when stock options, stock index futures and stock index option contracts expire simultaneously.
Ultimately, seasonal trends suggest that March will be wobbly and could be used as an excuse to sell further, but that downturn could be cathartic and give way to further gains in the spring.
“Further consolidation is likely in March, but we expect the market to find support soon and then challenge the recent highs again,” Hirsch writes, pointing out that April is statistically the best month of the year.
Stock Trader’s Almanac
Looking beyond seasonal trends, it is uncertain how the rise in bond yields will work out and eventually ripple through the markets.
On Friday, the benchmark closed 10 years with a return of 1.459% based on 3:00 pm Eastern close, reaching an intraday peak of 1.558%, according to FactSet data. The total dividend yield for S&P 500 companies was 1.5% in comparison, while the Dow is 2% and for the Nasdaq Composite 0.7%.
On how far rising interest rates will be a problem for equities, strategists at Citigroup argue that interest rates are likely to continue to rise, but the advance will be controlled by the Federal Reserve at some point.
“The Fed is unlikely to let real interest rates in the US rise much above 0%, given the high leverage of the public and private sectors,” analysts from Citi’s global strategy team wrote in a note on Friday titled “Rising. Real Yields: What to do. “
Real adjusted returns are typically associated with interest rates on inflation-protected Treasury securities, or TIPS, which investors compensate based on inflation expectations.
Real returns were negative, which has arguably encouraged risk-taking, but the introduction of the coronavirus vaccine, with a Food and Drug Administration panel recommending approval for Johnson & Johnson’s JNJ on Friday,
a single-shot vaccine and prospects for further COVID support from Congress raise the outlook for inflation.
Citi notes that the 10-year TIPS rate fell below minus 1% as the Fed’s quantitative easing started last year to ease financial market tensions due to the pandemic, but are noticing in recent weeks the strategists noted that TIPs had gone up 0.6%.
Read: Here’s what a hedge fund trader said happened during Thursday’s bond market tantrum, pushing the 10-year government bond yield to 1.60%
Citi speculates that the Fed may not step in to stop disruptions in the market until investors see more pain, with the 10-year-old possibly hitting 2% before the alarm bells ring, bringing real returns closer to 0%.
A related sell-off of 10-20% of US stocks would also draw attention. But before then, the pain currently being distributed to growth-focused equity portfolios could get worse, ”write the Citi analysts.
Checking out: Cracks in this multi-decade relationship between stocks and bonds could shake Wall Street
Yikes!
The analysts don’t seem to be necessarily taking a bearish stance, but they do warn that a return to returns closer to historically normal could be painful for investors who have invested heavily in growth stock names compared to assets, including energy and financial services. that are considered value investments.
Meanwhile, markets will start looking for more clarity on the health of the labor market next Friday when the non-farm wage data for February is released. A big question about that important gauge of the health of US employment, in addition to how the market will respond to good news in the face of rising yields, is the impact the colder-than-normal February weather will have on the numbers.
In addition to job data, investors this week are looking at manufacturing reports for February from the Institute for Supply Management and construction spending on Monday. Services industry data for the month is expected Wednesday, along with a private sector salary report from Automatic Data Processing.
Read: The current bond market selloff is worse than a ‘taper tantrum’ in one major way, says analyst
Also read: 3 reasons why the rise in bond yields is gaining momentum and rattling the stock market