The Fed could be a catalyst for bonds, which could boost growth stocks in the coming week

Bonds could be volatile in the coming week. If yields rise, it could prevent big tech companies and other growth stocks from gaining traction.

Rising bond yields challenged growth stocks. Names like Apple, Tesla and Amazon are lagging behind as investors turn to cyclical groups that do well in an economic recovery. Despite this, the S&P 500 and the Dow Jones both closed at record highs on Friday, while the Nasdaq Composite was lower.

The Nasdaq, home to big tech, gained 3% last week, but is down 5.5% last month.

Next week’s bond market will likely draw inspiration from the Federal Reserve, which meets on Tuesday and Wednesday.

The central bank should give a nod to much better growth. Bond pros are also monitoring whether Fed officials will change their outlook for interest rates, which now does not include any rate hikes until 2023.

“The markets have far too high expectations of what the Fed will do or say,” said Gregory Peters, head of multi-sector and strategy at PGIM Fixed Income. “I think the message is going to be consistent.”

He said Fed Chairman Jerome Powell would likely appear dovish and that it was unlikely to give any timelines on when the central bank will change its bond buying program or other policy.

Bond yields, which move opposite to prices, have risen as the outlook for the economy improves.

This trade has also appeared on the stock market, with the Dow Jones rising 4% for the week ending Friday at a record 32,778. Consumer discretionary stocks, which include retail, were among the most performance, up 5.7%, fueled by optimism that individuals will spend their $ 1,400 stimulus checks.

Yields were higher on Friday after President Joe Biden said all adults would be eligible for a vaccine by May 1. The 10-year Treasury yield peaked at 1.642% – its highest level in over a year.

This is the key rate to watch as it affects mortgages and other consumer and business loans.

“The economy is going to be incredibly strong this year – spending deficit, reopening, vaccines,” said Peters of PGIM.

“It looks like for next year all numbers are revised up,” he said. “So this thing could have sustainable growth, so I think there will be pressure on the rates to go up.”

Bond yields have risen sharply over the past month. The rapid pace of the move has made stocks nervous as investors adjust to higher rates. The 10-year Treasury yield was 1.16% on February 12.

Over the past month, energy stocks have risen by almost 20%, financials by 10.2% and industrials by 7%. The S&P technology sector is down 5.4% from last month, and communications services, which include Internet names, rose 0.8%.

Higher rates are a challenge for tech stocks and other growth stocks because these stocks are expensive and have high price-to-earnings ratios.

“When rates are very low, valuations don’t matter to people,” said Peter Boockvar, chief investment officer at Bleakley Global Advisors.

“If the rates are low, there is no penalty,” he said. “If the rates start to go up, people become a lot more sensitive to valuations, and that’s what we’ve seen here.”

Scott Redler, partner of T3live.com, follows short-term stock market techniques and trades many growth stocks. Lately, however, he has found himself sitting in many valuable and cyclical names.

“The names I’m in – Visa, GM, Ford, Macy’s, 3M. These are my biggest winners this week,” he said. “It was really hard to make money with Apple, Facebook and Tesla.”

The Nasdaq was hit the hardest by the interest rate hike. Apple was down 0.3% last week, but 10.6% last month. The S&P 500 finished at a record 3,943 and was up 2.6% last week, but was flat last month, up just 0.2%.

“Rate volatility could cause another inflection point in technology,” Redler said. “Last week, technology hit its reactionary low, and this [past] week he had an oversold rebound. The question is: “Was that it?” “

“Next Wednesday, Powell could be the determining factor,” he said. “Rates have spiked higher and technology is far from the lows of last Friday, so maybe the market is getting more comfortable.”

Apple’s dropout is unusual for tech. This helped fuel market gains last year.

“Look at Apple because it’s a bit of everything. Apple is growth, technology, retail. If something is right, it should be Apple,” Redler said.

There is important data for the week ahead, including February retail sales and industrial production, both on Tuesday. There is also a $ 24 billion 20-year Treasury bill auction on Tuesday.

The main catalyst for the bond market remains the Fed.

The bond market has speculated on something the Fed may not discuss after its Wednesday afternoon meeting. In one of its efforts to support the economy during the pandemic, the Fed allowed banks to hold treasury bills without counting them against the bank’s debt ratio. This strategy allowed institutions to have more flexibility to use their balance sheets for activities such as lending.

The program expires on March 31.

“It’s a huge problem basically because you have so much treasury supply to come and restore [the rule] basically it’s very punitive for banks to own treasury bills, ”said Peters of PGIM.

“The markets are kind of divided over what’s going to happen,” he said. “I think most pundits think an extension is the right way to go. You haven’t heard from the Fed about it.”

Peters expects the Treasury market to remain volatile.

“I think you’re going to see more volatility in a high pressure growth economy with extremely large deficits and an accommodating Fed,” he said. “I think you’re going to see those whip moves.”

Monday

8:30 a.m. Making the Empire State

4:00 p.m. Data from Treasury International Capital

Tuesday

Earnings: Volkswagen, Designer Brands, Jabil, Lennar, Coupa Software, CrowdStrike

Federal Open Markets Committee begins two-day meeting

8:30 am Retail sales

8:30 am Import price

8:30 a.m. Survey of business leaders

9:15 am Industrial production

10:00 a.m. Business inventory

10:00 a.m. National Association of Home Builders survey

Wednesday

Earnings: Cintas, Lands’ End, Five Below, Herman Miller, American Outdoor Brands

8:30 a.m. Housing starts

2:00 p.m. Fed statement

2:30 p.m. Briefing by Fed Chairman Jerome Powell

Thursday

Earnings: FedEx, Dollar General, Nike, Petco, Accenture, Commercial Metals, Bookmark Jewelers

8:30 a.m. Initial complaints

10:00 a.m. Philadelphia Fed Investigation