Damaged markets look to Treasury yields to measure stock paths

Texas News Today

FILE PHOTO: The front of the New York Stock Exchange (NYSE) is seen on February 16, 2021 in New York, USA. Reuters / Brendan McDermid / File photo

2 October 2021

luis klaskov

NEW YORK (Reuters) – Investors are critical in deciding how the stock will be distributed for the rest of the year, a month after the stock posted its biggest loss since the coronavirus pandemic began. We are looking at the yield of the Finance Ministry as a major factor.

The S&P 500 index posted its biggest monthly decline in September since March 2020, but fell 5% below record highs for the first time this year.

US Treasury yields hit a three-month high, volatile stock prices, a fierce battle over US debt caps, the fate of large infrastructure spending bills, and the collapse of debt-heavy Chinese real estate developer China. increased market concerns. Evergrande Group. The S&P 500 is up 16% again this year.

Sam Stovall, chief investment strategist at CFRA, said:

Yields, which are inversely proportional to bond prices, have recovered from historically low levels, and the recent increase is widely seen as a sign of economic strength.

His rally follows the Federal Reserve Board’s bullish trend at last week’s monetary policy conference. The central bank said it began reducing its $120 billion monthly government bond purchase program in November and could start raising interest rates sooner than next year.

Nonetheless, rising yields, such as the 27 basis point move recorded by the Fed’s 10-year benchmark notes, could dampen the attractiveness of equities. Barring the weekend’s growth, the 10-year yield was up around 1.47%.

Equities and bonds may get a clue from progress in Washington next week. In Washington, lawmakers continue to discuss an infrastructure spending package, as will the US monthly employment report next Friday.

One of the indicators that investors use to gauge the future trajectory of equities is the yield difference between 2-year and 10-year government bonds. Some see it as a barometer of whether the economy is slowing or warming.

Spreads of 0 to 150 basis points are the “sweet spots” of equities, according to Ed Clisold, chief US strategist at Ned Davis Research, and historical data shows the S&P 500’s annual return is in line with 11%. .. According to CFRA’s Stovall, the S&P 500 has seen an average increase of 9.1% each year since 1945.

The spread has recently jumped to around 120 basis points on Friday. When spreads exceed 150 basis points, “it struggles with stocks,” Chrisold said, historically equivalent to an annual return on the S&P 500 of 6%.

“A too steep curve means inflation could spiral out of control and the Fed may have to tighten sharply,” Crissolde said in a report this week.

Analysts at Goldman Sachs said the rate of growth in yields is as important as the economic and monetary policy background.

In a recent report, banks compared the increase of 50 basis points with the recent increase in yields earlier this year.

Bank analysts said past growth reflects an improvement in the economic outlook, but now “economic growth is slowing. reduced.”

Higher returns put pressure on stock valuations by increasing the rate at which future cash flows are discounted. This is a typical method of pricing shares. Such pressures are particularly acute for technologies and other growth stocks, whose valuations are highly dependent on future profits.

The S&P 500 Technology Index has fallen 2% since the Fed meeting last week, while the overall index is down 0.9%. Weakness in the tech sector, which accounts for more than 27% of the S&P 500’s weight, and other tech stocks are a problem with the broader index, even if higher yields benefit financially sensitive stocks like banks. This could be the reason for this.

Despite rising yields, many investors still find equities more attractive than bonds. According to Keith Lerner, co-chief investment officer at Truist Advisory Services, the equity risk premium, which compares returns on equity to returns on 10-year government bonds, is now in favor of equities.

According to Lerner, the S&P 500 averaged 10.2% higher than one-year return on the 10-year Treasury when its premium historically reached its closing price on Wednesday.

Matt Perrone, Director of Research at Janus Henderson Investors, said:

(Reporting by Lewis Kraskoff, Additional Reporting by Noel Randevich in San Francisco, edited by Ira Iosbashvili and Richard Chang)

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