By Vivien Lou Chen
The 5% 10-year Treasury yield is no longer considered a level that could trigger a stock market correction, portfolio manager says
Higher U.S. inflation is dashing investors' hopes for multiple Federal Reserve interest rate cuts this year, while opening the door to overall 5% Treasury yields and splitting the stock market into different categories of winners and losers. Winners are being identified as those companies with lots of cash and little debt, protecting them from the need to borrow or refinance at higher interest rates.
Before tensions in the Middle East came to the fore on Friday, tech stocks were driving the stock market toward a mostly bullish finish just a day after March's higher-than-expected consumer price inflation report, published on Wednesday. In contrast, small caps, as reflected in the Russell 2000 RUT index, suffered one of the worst post-CPI reactions, ending the week down 2.9%. -cut expectations, warns BofA. The prospect that the Fed will not cut rates in 2024, or that cuts will be less than the three-quarters of a point projected by policymakers, has led to relatively sharp and rapid increases in bond yields. of the Treasury, measures that normally cause problems for the stock market, as well as the entire market.
However, something a little different might be happening this time. Higher market-based interest rates are impacting sectors differently, extending the survival of the fittest theme that began with the onset of the 2020 Covid-19 pandemic. "Anything that is sensitive to interest rates would be the loser, like cryptocurrencies, small caps and industrials, which had been buoyed earlier this year by a lot of hopes and expectations for rate cuts," said Ben Emons, manager portfolio senior. and head of fixed income at NewEdge Wealth in New York, which manages more than $45 billion in assets. It's difficult to say what levels the benchmark S&P 500 SPX index or U.S. stocks in general should trade at, given the continued strength of the economy, Emons said by phone. Meanwhile, the risk of war in the Middle East threatens to unleash more inflationary pressures and oil prices are likely to rise, followed by Treasury yields, he said. Fears about escalating tensions between Iran and Israel rocked financial markets on Friday, with the Dow Jones Industrial Average DJIA posting its biggest weekly loss since March 2023. However, the Dow Jones is still up 0.8%, or 293.70 points, for all of 2024 at 37,983.24. And so far this year, the S&P 500 is up 7.4%, or 353.58 points, to 5,123.41 and the Nasdaq COMP Composite Index is up 7.8%, or 1,163.74 points, to 16,175.09. See also: Iran-Israel fears sink stocks as traders rush into gold, Treasuries
"One thing to expect is yields closer to 5% across the entire Treasury curve," a prospect that is less likely to trigger a stock market correction than in 2022, when the Fed was behind the Treasury curve. inflation, according to Emons. "You would need returns close to 6% for something like that to happen," he said. The bottom line is that U.S. economic growth is not slowing as much as many expected, despite the highest interest rates in more than 20 years. , between 5.25% and 5.5%. JPMorgan Chase & Co. (JPM) CEO Jamie Dimon and former U.S. Treasury Secretary Larry Summers are among the big names who have suggested over the past week that interest rates may need to rise from From now. Read: "There is a serious possibility" that the Fed's next move will be a rate hike, warns Larry Summers. Interest rates could reach 8% or more and wars are creating outsized geopolitical risks, warns Jamie Dimon. Wednesday's consumer price index for March showed the headline annual rate of inflation rose to 3.5% from 3.2% previously, and came less than a week after nonfarm payrolls data revealed that The United States created 303,000 new jobs, more than expected, last month. The midweek CPI report sparked the biggest one-day jumps in 2- and 10-year Treasury yields in at least a year. Suddenly, yields of 5% or more on all US government debt seem feasible. "Right now, the market thinks the Fed can still lower rates, but the real question is whether the central bank will raise rates," said Robert Daly, who manages more than $4.5 billion in assets as chief income officer. office of Glenmede Investment Management in Philadelphia.
By phone, Daly said there is less than a 10% chance that Fed policymakers will raise interest rates again, but he sees a high probability that there will be no rate cuts, which should push up yields. Treasury bonds and will weigh on the minds of investors, who will wonder where risky assets are priced. "There will be winners and losers and you have to choose the venue accordingly," Daly said. "I prefer high quality fixed income and would be safe. Companies that have strengthened their balance sheets, with limited refinancing needs, may be the winners in this environment."
Senior research analyst Violeta Todorova at London-based Leverage Shares, a provider of exchange-traded products, said her firm is "bullish on financials, energy, materials and selectively on technology, while the real estate sector is still performing lower". is for two 25 basis point cuts in 2024, and we see a good chance that US stock markets [will] rise about 10%" from early Friday levels, Todorova said in an email to MarketWatch. In the event of no Fed rate cuts in 2024, "we will likely only see a modest increase [in stocks] "by the end of the year," according to the analyst. In a scenario without rate cuts, his firm's targets would be 40,400 for the Dow Jones Industrial Average, 5,330 for the S&P 500 and 18,750 for the Nasdaq-100 NDX, he said. However, if inflation continues to rise and forces the Federal Reserve to make another hike in 2024, "the stock market rally is likely to stall and a deeper correction will occur as soon as that probability gains strength," he said. Todorova. the least likely scenario and one that would likely leave the Dow Jones Industrial Average trading around 37,200, the S&P 500 at around 5,000 and the Nasdaq-100 at around 17,200 by the end of the year. along with the New York Empire State Manufacturing Survey and the April Home Builder Confidence Index.
March data on housing construction, construction permits and industrial production will be presented on Tuesday. The Federal Reserve's Beige Book report will be released on Wednesday. Thursday's data includes weekly initial jobless claims and the Philadelphia Federal Reserve's manufacturing survey for April, as well as March existing housing claims and leading U.S. economic indicators. Several Federal Reserve officials are scheduled to speak throughout the week, starting with Dallas Fed President Lorie Logan in Tokyo on Monday.
-Vivien Lou Chen
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04-14-24 1201ET
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