With a 10-year yield of less than 1.7%, investors are focusing on equities linked to big tech

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Key points to remember:

  • S&P 500 in search of 19th record this year
  • First weekly jobless claims reached 744,000, more than expected
  • FOMC minutes show Fed pledged to easy monetary policy

Megacap tech-related stocks might end up being the case today as the market as a whole looks well supported, but without a catalyst to make big, higher moves.

The names FAANG – Facebook (FB
FB
), Apple
AAPL
(AAPL), Amazon
AMZN
(AMZN), Netflix
NFLX
(NFLX) and Alphabet’s Google (GOOGL) – appear to be in recovery mode as the 10-year Treasury yield remains below 1.7%.

These are trusted names that investors tend to buy on the dips right now, as people try to figure out where the next market direction is going to go. There is still an ongoing valuation debate as investors and traders continue to assess the state of the economic recovery and whether they want to invest more money in stocks at home or back at work. on a given day.

The performance of growth stocks, including FAANGs, is linked to the economic recovery in part because of fears that the recovery will be accompanied by potentially problematic inflation. As inflation expectations and the 10-year Treasury yield rise, growth stocks can suffer, as inflation expectations can eat away at what people think they might be worth in the future.

So if we see the 10-year yield rebound above 1.7%, we might see more pressure on tech-related megacaps and other growth stocks.

Meanwhile, investors appear confident in the market given the Fed’s reiterated monetary policy and the help of the vaccine rollout for the economy.

This leaves the SPX in search of another near record. If he can handle that today, it would be the index’s 19th record this year, which is pretty amazing considering we’re just over a quarter in the year.

Watch the grass grow

Some days market activity is a bit like watching beige paint dry – but that’s not very interesting – compared to the action of the past year, which has been a bit of a bit at times. too much hectic. This week, trading volumes have been weak and the Cboe Volatility Index (VIX) continued its slow downtrend. VIX starts the day with a 16 handle for the first time since February 2020 (see graph below).

Sometimes that can be a good thing. While stocks are doing as well as they’ve been, a rather sideways day is probably healthy. The three major US stock indices ended mixed yesterday with the S&P 500 Index (SPX) and the Dow Jones Industrial Average ($ DJI) posting slight gains and the Nasdaq Composite (COMP) posting a slight loss.

The lackluster trading came as the minutes of the Fed’s latest policy meeting weren’t surprising. Central bankers said the economy was far from reaching peak employment and price stability, which we already knew. Even though the latest jobs report was better than expected, weekly jobless claims figures remain high. And inflation remains below the Fed’s 2% target.

Against this backdrop, central bankers also reiterated that asset purchases – which contributed to easy monetary policy with the Fed’s very low key interest rate – would continue, something else we already knew.

So, at the end of the day, the favorable news about accommodative politics and the negative news about economic uncertainty seemed like a wash for investors, as these issues have already been baked into the proverbial cake.

Dimon in the rough

The Fed was not alone in sending a mixed message on Wednesday. Jamie Dimon, CEO of JPMorgan Chase
JPM
, said an economic boom could last until 2023. This is particularly encouraging from the head of America’s largest bank.

But Dimon also said it’s possible that a rise in inflation might not just be temporary. Such a scenario would likely erode the value of growth stocks and push investors further into cyclical stocks that would benefit from economic gains.

Inflation expectations have helped push up long-term treasury bill yields as vaccines open up the economy, stimulus checks hit bank accounts, Washington discusses big infrastructure spending, and the Fed maintains the easy monetary policy.

Some – including Fed policymakers – believe that a spike in inflation may be transient, but another school of thought is concerned that it is a longer-term problem. This has already put some pressure on growth stocks, but that pressure has eased as yields have more or less stabilized.

Still, with the 10-year drop below 1.7%, the inflation story seems to be taking a back seat, as renewed interest in big tech simmers slowly up front.

I’m just passing by: Later this week, we’ll come back to inflation in the form of producer prices. This economic measure probably isn’t as closely scrutinized as consumer price data, but the producer price index is still an important one to watch. While companies that produce goods may shoulder some of the rising costs that accompany, for example, rising commodity prices, they are not likely to swallow all of them. This means that they will pass those costs on to consumers, a phenomenon that is already happening in the US manufacturing sector. On Friday, the March Producer Price Index is expected to post a 0.5% increase, according to a consensus from Briefing.com. Last time around, the Market Information and Research Service said, “There was a line of fire to inflationary pressures from pipelines.

The fleas have fallen: We have already talked about the global shortage of microprocessors, as this has been an Achilles heel for automakers just at a time of increasing demand. Government data on Wednesday highlighted how the chip shortage is affecting the US economy, as auto imports have fallen. Census Bureau data showed that the US trade deficit in February increased more than expected to a record $ 71.1 billion, with exports falling 2.6% and imports 0.7%. “The main finding of the report is that the impact of the semiconductor shortage was apparent in the $ 3.4 billion decline in imports of automotive vehicles, parts and engines,” Briefing.com said. With the economy recovering and automobile demand increasing, foreign and domestic automakers have warned that chip shortages are holding back production.

Revolving door: Another apparent sign of the economic recovery, consumer credit rose much more than expected in February, according to data released Wednesday. Total credit jumped $ 27.6 billion as a consensus from Briefing.com expected only a gain of $ 5 billion. “The main takeaway from the report is that revolving credit only increased for the second time in the past 12 months and was the biggest increase in revolving credit since July 2019,” said Briefing.com. The Federal Reserve’s consumer credit report highlights the amount of revolving credit, like credit cards, and non-revolving credit, like auto loans, that Americans have outstanding. Rising consumer debt can be an indicator that people are more comfortable with the economy and their job prospects and can be a boon to consumer spending making its way into reports on personal consumption and retail sales. Consumer spending constitutes the largest percentage of contribution to gross domestic product.

TD Ameritrade® reviews for educational purposes only. SIPC member.

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