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After a frenzied February, investors are probably hoping that March stays true to its proverb: In like a lion come out like a lamb.
Indeed, February turned out to be a doozy, with benchmark bond yields, represented by the 10-year Treasury note TMUBMUSD10Y,
and the 30-year long-term bond TMUBMUSD10Y,
reporting their biggest monthly increases since 2016, according to Dow Jones Market Data.
The move was a stark reminder to investors that bonds, viewed as mundane and straightforward by some investors, can still wreak havoc in the market.
A final wave of trading, some $ 2.5 billion in sales near Friday’s close, created a major downward drag for stocks in the closing minutes of the session and may imply that there could be more air pockets before the market stabilizes next week.
The Dow Jones Industrial Average DJIA,
and the S&P 500 SPX index,
barely held above their 50-day moving averages, at 30,863.07 and 3,808.40, respectively, at Friday’s close.
“An associated sale of 10 to 20% of US stocks would also draw the spirits. But before that, the pain currently inflicted on growth-oriented equity portfolios could get worse. Citigroup strategists
“The turmoil is probably not over,” wrote independent market analyst Stephen Todd, who runs Todd Market Forecast, in a daily note.
Yet despite all the doubts about higher-than-expected returns, February stocks still managed to deliver solid returns. For the month, the Dow ended up 3.2%, the S&P 500 recorded a 2.6% gain in February, while the Nasdaq posted a 0.9% return, despite a weekly loss of 4.9% recorded Friday which marked the worst weekly slippage since October. .30.
Many have argued that a massive sell-off of the technology-intensive Nasdaq Composite was inevitable, especially with buzzing stocks like Tesla Inc. TSLA,
only become more sparkling by certain measures.
“But the market has been overbought and expanded throughout the year and arguably for several months at the end of 2020,” Jeff Hirsch, editor of the Stock Trader Almanac, wrote in a note dated Thursday.
“After the big boom in the first half of February, people looked for an excuse to take a profit,” he wrote, describing February as the weak link in what is usually the best period of gains in the world. six months for the stock market.
The beneficiaries of recent rate moves so far appear to be the banks, which benefit from a steeper yield curve as long-term treasury yields rise, and the financial sector of the S&P 500 SP500. .40,
XLF,
finished down 0.4%, in fact the second best weekly performance of the 11 sectors in the index behind energy SP500.10,
which jumped 4.3%.
SP500.55 Utilities,
were the worst performers, down 5.1% over the week and consumer discretionary SP500.25,
was the second worst, with 4.9%.
In February, energy posted a gain of 21.5% as crude oil prices rose, while financials rose 11.4% for the month, recording the best and second best monthly performance.
So what can you expect for March?
“Typical March trades come in like a lion and come out like a lamb with force during the first few days of trading, followed by choppy lower trades until mid-month, when the market tends to rebound.” , writes Hirsch.
Mars also sees “a triple witchcraft: occur on the third Friday, when stock options, stock index futures, and stock index options contracts expire simultaneously.”
Ultimately, seasonal trends suggest March will be wobbly and could be used as an excuse for further sales, but on this downturn can 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 question recent highs,” writes Hirsch, noting that April is statistically the best month of the year. .
Almanac of the stock trader
Beyond the seasonal trends, it is uncertain how the rise in bond yields will play out and ultimately trickle down to the markets.
On Friday, the benchmark 10-year note closed at a yield of 1.459% based on the 3pm eastern close, and hit an intraday high of 1.558%, according to FactSet data. The dividend yield for the S&P 500 companies in total was 1.5%, in comparison, while the Dow Jones is 2% and for the Nasdaq Composite 0.7%.
As to how much of a problem rising yields will be for stocks, Citigroup strategists argue that yields are likely to continue to rise but the advance will be held back by the Federal Reserve at some point.
“The Fed is unlikely to let US real yields rise much above 0%, given high levels of public and private sector debt,” analysts from Citi’s global strategy team wrote. in a note dated Friday titled “Rising Real Yields: What to Do.” “
Real adjusted returns are generally associated with Inflation-Protected Treasury Securities rates, or TIPS, which compensate investors for inflation expectations.
Actual returns have been negative, which arguably encouraged risk-taking, but the rollout of the coronavirus vaccine, with a Food and Drug Administration panel on Friday recommending approval for Johnson & Johnson’s JNJ,
one-jab vaccine, and prospects of further congressional COVID aid, boost inflation outlook.
Citi notes that 10-year TIPS yields fell below minus 1% as the Fed’s quantitative easing last year was launched to help ease the strains in financial markets created by the pandemic, but In recent weeks, strategists note that TIPs had climbed to minus 0.6%.
Read: Here’s what a hedge fund trader says happened during Thursday’s bond market slump, which sent the 10-year Treasury yield to 1.60%
Citi speculates that the Fed may not step in to stem the disruption in the market until investors see more pain, with the 10-year potentially reaching 2% before the alarm bells sound, which would bring actual returns closer of 0%.
“An associated sale of 10 to 20% of US stocks would also draw the spirits. But before that, the pain currently inflicted on growth-oriented equity portfolios could worsen, ”Citi analysts write.
Check: Cracks in this multi-year relationship between stocks and bonds could shake Wall Street
Yikes!
Analysts don’t appear to be taking a bearish stance per se, but they warn that a return to returns closer to historical normal could be painful for investors heavily invested in growth stocks versus assets, including the energy and finance, which are considered valuable investments.
Meanwhile, markets will seek more clarity on the health of the labor market next Friday, when non-farm payroll data for February is released. A big question about this key indicator of the health of employment in the United States, beyond how the market will react to the good news in the face of rising yields, is the impact of colder weather than February normal on the data.
In addition to employment data, investors will be watching the Institute for Supply Management’s February manufacturing reports and construction spending this week on Monday. Service sector data for the month is due Wednesday, along with a private sector payroll report from automatic data processing.
Read: Current bond market selloff is worse than ‘taper tantrum’ in key way, analyst says
Also read: 3 reasons why rising bond yields are gaining momentum and rocking the stock market
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