Growth, technology stocks falling out of favor?

Fundamental stock forecast: Slightly bearish

• Growth stocks, the Nasdaq 100 and the Taiwan index plunged last week
• Increasing long-term Treasury yields, driving portfolio reallocations
• Valuable stocks may hold, as the Fed seemed optimistic about the bond market

Value Equities gaining a voice while growth falters

At first glance, the past week has been quite disheartening for global equity markets. But a closer look revealed that it seemed more similar to the forces driving change in portfolio allocations and a growth rotation for value stocks. On Wall Street, the Dow Jones Industrial Averaged rose about 1.75% in the last 5 trading sessions. The S&P 500 was up about 0.75. But, the high-tech Nasdaq 100 fell more than 2%.

To better illustrate, let’s take a look at Taiwanese stocks. The Taiwan index has performed strongly in the Asia-Pacific region since last year’s low of Covid, rising about 90% to last month’s high. About 62% of the index’s weight is concentrated in technology. The nation exports mainly integrated circuits. Taiwan’s index was also one of the worst performers in the APAC region last week, down 3.63%

The increase in Treasury yields in the largest economy in the world is probably driving this dynamic. The 10-year rate is now over 200% from last year’s low, at a point reaching 1.62% last week. It also meant that government bonds exceeded the annual dividend yield of the S&P 500 – see the chart below. This is slowly making it more expensive to give up equity securities, resulting in changes in portfolio allocations.

Comments by central bank officials last week seemed to suggest that higher long-term rates are still not a concern. Treasury yields widened earnings after Fed Chairman Jerome Powell spoke last week. ECB Vice President Luis de Guindos said the central bank is not in the game of controlling the interest curve. However, Bank of Japan Governor Haruhiko Kuroda expressed the importance of keeping long-term interest rates steadily low.

10-year treasury yield versus S&P 500 dividend yield

With that in mind, it appears that growth stocks seem the most vulnerable amid rising long-term Treasury yields. Expectations of economic recovery and rising hopes for US fiscal stimulus are helping to boost reflective trade. Still, losing monetary policy is here to stay, with upfront fees being deprived of much income. This remains a prominent and unmistakable upward force for stocks in general.

As such, information technology stocks and shares with high perceived ratings – such as Tesla and Nvidia – remain the most at risk of volatility in the short term. But, the broader market may still remain intact. That is how the United States starts vaccinations with the Johnson & Johnson single injection vaccine. All eyes are also on the Bank of Canada and the European Central Bank to see what their ongoing views on long-term rates are this week.

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Wall Street index versus average long-term treasury yields

Chart created in TradingView

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on twitter