Treasury bonds hindering resumption U. S. stock market rally
2023.02.22 02:58
Treasury bonds hindering resumption U. S. stock market rally
By Ray Johnson
Budrigannews.com – As rising Treasury yields make bonds more appealing and skew equity valuations, cracks are appearing in the early-year stock rally.
Stocks have largely resisted a rise in Treasury yields over the past few weeks, which came amid indications that the Federal Reserve may be required to raise rates at a higher rate than anticipated in order to cool the economy and control inflation.
However, market participants warn that yields are approaching a danger zone where equity prices will quickly lose their appeal. For instance, six-month Treasuries are at their highest level in nearly 16 years, offering investors 5.02 percent on an asset that many people consider to be significantly safer than stocks.
According to Jonathan Golub, chief U.S. market strategist at Credit Suisse, “All of a sudden inflation is a little bit stronger than we thought and the Fed looks like they will keep raising rates, and that’s absolutely a challenge for stocks when you can get short-term paper that yields 5%.”
Despite the fact that a portion of their rally has waned in recent days, stocks are still enjoying significant gains year to date. The is still up 4.1% year-to-date, despite being down 4.4% from recent highs. Tuesday marked the index’s worst single-day decline since 2023, when it lost more than 2%.
Since its lows in January, the benchmark has increased by approximately 60 basis points. Its movement is inverse to that of bond prices.
Some strategists warn that a so-called “no-landing” scenario, in which the Fed is unable to cool the economy soon, could force policymakers to increase the rate increases that shook markets last year, potentially driving yields even higher.
BlackRock strategists (NYSE:), Tuesday, the largest asset manager in the world stated that the Fed’s likely tightening of policy would likely be “bad news for risk assets.”
The company stated that it would increase its exposure to emerging markets, maintain its “underweight” position in developed market stocks, and increase its allocations to short-term Treasuries.
The company’s strategists wrote, “Fixed income finally offers ‘income’ after yields surged globally.” After years of investors being starved for yield, this has increased the appeal of bonds.”
According to CME’s FedWatch tool, markets were pricing in a 24% chance that the Fed will raise rates by 50 basis points at its March 22 meeting on Tuesday afternoon, up from 0% a month ago.
Morgan Stanley (NYSE:) analysts, Meanwhile, it was noted on Tuesday that higher yields and the likelihood of earnings disappointments in the future have reduced the equity risk premium, or the potential reward that investors receive when holding stocks over bonds.
Michael Wilson, a strategist, wrote that this is a “death zone” that renders stocks’ “risk-reward very poor.”
Wilson stated, “We believe the risks are extreme now and nearly impossible to justify with any narrative one wishes to conjure up.”
Golub, of Credit Suisse, is bullish on non-U.S. stocks, which he said are exchanging at additional appealing valuations while rising yields and expansion could pressure U.S. corporate expenses.
For instance, the European companies index trades at a forward price to earnings ratio of 12.8, which is significantly lower than the S&P 500’s 18.2, while the 225 index trades at a forward P/E ratio of 15.4.
Golub stated, “You can get better underlying corporate profit growth for less money if you go outside of the U.S.”
Yes, bullish investors may have history on their side, as evidenced by the S&P 500’s massive gain of 6.2 percent in January. According to CFRA Research, years in which the S&P 500 has advanced in January have had an average 11-month rally of over 11% and posted an additional gain between February and December.
Others anticipate a stalemate in which markets make little progress. Goldman Sachs client investment strategist Elizabeth Burton expects technology stocks to be impacted by higher yields. Simultaneously, she accepts numerous financial backers will be reluctant to sell values after last year’s precarious decays, when the S&P 500 lost 19.4%. The company’s outlook for the coming year is neutral.
She stated, “This is becoming more of an environment for stockpickers where you can’t count on a rising tide lifting all boats.”
