The Fed can be a catalyst for bonds, and that could spur stock growth next week

Bonds may be volatile next week. If yields go up, this could make it difficult to gain strength for large company stocks and other growth stocks.

The increase in bond yields has challenged growth stocks. Names like Apple, Tesla and Amazon have lagged behind as investors move to cyclical groups that do well in an economic recovery. Even so, the S&P 500 and Dow closed at record highs on Friday, while the Nasdaq Composite fell.

Nasdaq, home to big technology, gained 3% last week, but fell 5.5% last month.

The bond market next week is likely to follow the tips of the Federal Reserve, which meets on Tuesday and Wednesday.

The central bank is expected to show much better growth. Bond professionals are also on the lookout to see if Fed officials will adjust their outlook for interest rates, which now do not include rate hikes until 2023.

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

He said that Fed Chairman Jerome Powell should sound peaceful and should not give any deadline on when the central bank will change its bond-buying program or other policy.

Bond yields, which fluctuate in contrast to price, have been rising due to the improved outlook for the economy.

That transaction also appeared on the stock market, with the Dow rising 4% for the week, ending Friday at a record 32,778. Consumer discretionary stocks, which include retail, were among the best performers, up 5.7%, driven by optimism that individuals will spend their $ 1,400 stimulus checks.

Yields were higher on Friday, after President Joe Biden said that all adults would be eligible for a vaccine by May 1. The Treasury’s 10-year yield rose 1.642% – its highest level in more than a year.

It is the basic rate to be observed, since it affects mortgages and other loans to consumers and companies.

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

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

Bond yields increased sharply in the past month. The rapid pace of change made stocks nervous as investors adjusted to higher rates. The 10-year Treasury yield was 1.16% on February 12.

Last month, energy stocks rose almost 20%, financial stocks rose 10.2% and industrial stocks rose 7%. The S&P technology sector fell 5.4% last month, and communication services, which include names on the Internet, rose 0.8%.

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

“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 rates start to rise, people will be much more sensitive to valuations, and that is what we saw here.”

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

“The names I’m on – Visa, GM, Ford, Macy’s, 3M. Those were my biggest winners this week,” he said. “It has been very difficult to make money on Apple, Facebook and Tesla.”

Nasdaq was hardest hit by rising interest rates. Apple fell 0.3% last week, but fell 10.6% in the previous month. The S&P 500 ended at a record 3,943 and climbed 2.6% last week, but is stable from last month, up just 0.2%.

“Rate volatility could cause another tipping point in the technology,” said Redler. “In the past week, technology has reached its reactionary level, and this [past] week he took an exaggerated leap. The question is, ‘Was that it?’ “

“Next Wednesday, Powell could be the determining factor,” he said. “Rates have reached higher highs and the technology is well below last Friday’s lows, so perhaps the market is becoming more comfortable.”

Apple’s shutdown is unusual for the technology’s thermometer. This helped to boost market gains in the past year.

“Watch Apple because it’s a little bit of everything. Apple is growth, technology, retail. If anything is going well, it must be Apple,” said Redler.

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

The biggest catalyst for the bond market remains the Fed.

The bond market has speculated on something the Fed cannot discuss after its Wednesday afternoon meeting. In one of its moves to support the economy during the pandemic, the Fed allowed banks to hold Treasury bills without counting them against the bank’s leverage ratio. This strategy allowed institutions to have more flexibility to use their balance sheet for activities such as loans.

The program expires on March 31.

“This is a big problem basically because you have a lot of Treasury supplies coming in and restoring [the rule] it basically makes it highly punitive for banks to own Treasury bonds, “said Peters of PGIM.

“The markets are a bit divided on what is going to happen,” he said. “I think most experts believe that an extension is the appropriate way. You haven’t heard from the Fed about it.”

Peters expects the cash market to remain volatile.

“I think we will see more volatility in a high-pressure growth economy, with extremely large deficits and an accommodating Fed,” he said. “I think you are going to see these whipped movements.”

Monday

8:30 Empire State manufacture

16h00 Data from the International Capital Treasury

Tuesday

Earnings: Volkswagen, designer brands, Jabil, Lennar, Coupa Software, CrowdStrike

Federal Open Markets Committee starts two-day meeting

8:30 Retail sales

8:30 am Import prices

8:30 am Research with business leaders

9h15 Industrial production

10 am Business inventories

10:00 National Association of Home Builders survey

Wednesday

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

8:30 am Start of accommodation

2:00 pm Fed statement

14:30 Fed Chairman Jerome Powell meeting

Thursday

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

8:30 am Initial claims

Philadelphia Fed Survey at 10am