America’s retirement planners senior planner Ken Moraif in today’s markets and investing in technology.
History suggests that the wave of sales that has affected technology stocks amid the recent rise in bond yields may still spread to the broader market.
The Nasdaq Composite fell 7.25% from the historic record of February 12 through Tuesday, as a strong 10-year yield increase has prompted investors to abandon shares of the heavy growth index. At the same time, the Dow Jones Industrial Average remained at 0.4% of its record peak.
Investors took advantage of the technology sale by buying shares in large companies like Tesla Inc. and Apple Inc. at highly discounted prices. But David Rosenberg, chief economist and strategist at Rosenberg Research, based in Toronto, warns that the current environment is very similar to what happened at the peak of the dot-com bubble.
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In the early 2000s, the vision, as today, “was that stocks were no longer sensitive to interest rates and that the business cycle had been revoked,” said David Rosenberg, chief economist and strategist at Rosenberg Research, based in in Toronto.
Between mid-March and mid-April of that year, the Nasdaq Composite fell 20%, while the Dow Jones remained close to its historic highs. In late 2000, the Nasdaq was cut in half, while the Dow fell by more than 9%.
Before the recession began in March 2001, the Nasdaq had dropped 66% and the Dow had lost 15%.
“The lesson here is that near or at the peak of the market, it is common for the Nasdaq to first succumb to fears of exaggerated inflation and rising bond yields, and after the mega-caps slip, the Dow follows with a delay,” said Rosenberg. “And blue-chips are decreasing, albeit at a slower pace.”
The 10-year Treasury yield rose 64 basis points this year to 1.56%, a 13-month high, amid concerns about the unprecedented amount of fiscal and monetary stimuli used to combat the economic slowdown caused by the COVID-19. missing since the 2008 financial crisis.
Traders will be paying close attention to ten years in the coming days, as President Biden’s $ 1.9 trillion COVID-19 aid package is due to pass through the House of Representatives on Wednesday and be sanctioned on Sunday. The White House has already said it is working on a recovery package that can address infrastructure, climate change, inequality or other promises that Biden made during the campaign.
The story indicates that “there is still no 10Y yield top and a downward bias remains,” wrote Paul Ciana, technical strategist at Bank of America.
The last two major sales of the bond market, in 2016 and 2012, resulted in an increase of 10 years’ yield by 132 basis points and 162 bps, respectively. Measuring from the August 2020 low of 0.515% suggests that the top yield may occur in the area of 1.82% to 2.13% and begin to graduate in May, according to Bank of America analysis. In both examples, the top took about three months to graduate.
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Deutsche Bank strategists say a “top-down approach” points to a 10-year timeframe of 2% to 2.25%, but says that this level will be reached later this year.
The company says that, in the end, it will be the Federal Reserve that will determine whether the US economy will emerge from the low inflation regime.
“Given Biden’s current fiscal plans, the market is expected to estimate more than 50% probability on this side of the 2022 mid-term election,” wrote Deutsche Bank strategists led by Francis Yared.