Will Central Banks Boost Tech?
The Dow Jones Industrial Average jumped to another record high on Friday as rising reopening optimism continued to encourage the rotation into cyclical stocks. Meanwhile, surging bond yields rekindled valuation fears and took the comeback momentum out of tech names.
The 30-stock benchmark climbed 293.05 points, or 0.9%, to close at a record at 32,778.64. Bank stocks gained amid rising rates, while industrials continued their strength on the back of new stimulus. Goldman Sachs shares jumped 2%, and JPMorgan climbed 1.2%. Boeing and Caterpillar popped 6.8% and 4.2%, respectively.
The S&P 500 erased earlier losses and inched up 0.1%, eking out a record close of 3,943.34. Tech and communication services were the only two sectors registering losses. The Nasdaq Composite shed 0.6% as rates surged. Alphabet and Facebook dropped 2% each, while Apple, Amazon and Microsoft all closed in the red.
The 10-year Treasury yield jumped 10 basis points to 1.64% at its session high Friday, hitting its highest level since February 2020. The benchmark rate started 2021 at around 0.92%.
The rapid rise in bond yields prompted investors to dump the Nasdaq names again after a brief rebound earlier this week. Sharp increases in interest rates can put outsized pressure on high-growth tech stocks as they reduce the relative value of future profits.
“Higher rates, less dovish central banks are now considered to be the single biggest threat for risk assets,” Ralf Preusser, Bank of America’s rates strategist, said in a note. “With the passage of the US fiscal stimulus package and the blistering progress in vaccinations in the US, a number of other key risks are falling by the wayside.”
Ned Davis Research estimated that the Nasdaq 100, the tech heavy index which tracks the 100 largest non-financial companies in the Nasdaq Composite, would drop another 20% if the 10-year yield hits 2%.
Friday’s sell-off pared the Nasdaq’s weekly gain to 3%. The S&P 500 rose 2.6% this week, while the blue-chip Dow outperformed with a 4% rally. The Russell 2000 advanced 0.6% to a record Friday, bringing its gains this week to more than 7%.
“I think the story is becoming very, very clear in the tech sector. We have incredibly high valuations and yields that have tripled from the low last year,” said Robert Conzo, CEO of The Wealth Alliance. “You are going to see a lot of volatility in the tech sector. There’s a better trade out there in the cyclicals.”
Investors piled into names tied to an economic recovery after President Joe Biden’s $1.9 trillion Covid-19 relief package became law.
Biden’s much-anticipated relief bill will send direct payments of up to $1,400 to many Americans as soon as this weekend, and will also put nearly $20 billion into Covid-19 vaccinations and $350 billion into state, local and tribal government relief.
Biden announced Thursday evening that he would direct states to make all adults eligible for the vaccine by May 1 in his first primetime address as president. Biden also set a goal for Americans to be able to gather in person with their friends and loved ones in small groups to celebrate the Fourth of July.
Ari Levy of CNBC also reports the tech-heavy Nasdaq has underperformed the Dow for four straight weeks — a first since 2016:
Investors are finally rotating out of tech stocks after a decade of outperformance.
For the fourth straight week, the tech-heavy Nasdaq Composite trailed the Dow Jones Industrial Average. It’s the longest such streak since April-May 2016, which was also the only year since 2011 that the Dow beat the Nasdaq.
Market experts have been predicting a tech cooldown for years and have been consistently wrong, thanks to the increasing dominance of mega-cap companies like Apple and Amazon, the frenzy around Tesla and the massive shift in spending to cloud computing.
“It’s been years of frustration trying to get that trade right,” said Jack Ablin, who oversees $12.5 billion as chief investment officer at Cresset.
Ablin said this time feels different. Starting in the fourth quarter, his firm rolled out a new “quality dividend strategy,” moving clients out of technology and into industrials, financials, materials and energy companies. He was betting on a Democratic sweep in November, followed by a big stimulus package that would pump money into the economy, leading to inflation and higher interest rates.
The 10-year Treasury rose to its highest level in over a year on Friday, reaching as high as 1.642%. Rising rates give investors an incentive to shift money towards fixed income, while inflation tends to have an outsized impact on growth companies because it dampens expectations for future profits.
Meanwhile, the $1.9 trillion coronavirus relief package that President Joe Biden signed on Thursday will send direct payments of $1,400 to most Americans, and will also expand the child tax credit and provide rental and utility assistance.
Add to that Biden’s pronouncement that all adults will be eligible for a Covid-19 vaccine by May 1, and the economy looks poised for a big rebound in 2021.
“There’s pent-up demand for actually going out and doing stuff, taking vacations, going to bars and restaurants,” Ablin said. People are going to “take all that money on the sidelines and spend it,” he said.
Even though Biden and the Democratic Congress are focused on expanding green energy alternatives, the current outlook for travel and getting back to work is benefiting traditional oil and gas companies. Within the S&P 500, energy stocks are performing the best this year, up 40% as a group. The top-performing groups this week were consumer discretionary stocks, real estate and utilities.
The Dow Industrials rose 4.1% for the week to close at a record 32,778.64. After three straight weeks of declines, the Nasdaq climbed 3.1% to 13,319.87. For the year, the Dow is up 7.1%, while the Nasdaq has gained 3.4%.
Ablin knows that it’s too soon for a victory lap. Even as tech broadly is underperforming, there’s still a ton of money going into even more speculative assets. Bitcoin has almost doubled in value this year, and on Wednesday a non-fungible token (NFT) by the artist Beeple sold for more than $69 million in an auction through Christie’s.
Ablin said he was just asked about NFTs by a client on Thursday. While he admits to not having a strong viewpoint on them, he said that if recipients of stimulus money opt for risky investments instead of traveling and buying consumer goods, the market could look very different in the coming months.
“If it really doesn’t get spent but gets plowed into the market, that would pull the rug out from under our thesis,” Ablin said. For example, he said, “If instead of taking their vacation, they go buy Tesla stock.”
Tesla shares did jump 16% this week. But that was after tumbling 30% over the prior month.
Earlier today, Tom Lee told CNBC he believes the technology sector likely put in its bottom for the year last week, part of his broader view that the S&P 500 overall has more room to run.
“I think tech made its local bottom for the first half. I think tech is going to rally,” the Fundstrat Global Advisors said on “Halftime Report,” adding later in the interview it could be the sector’s low for the year.
So did tech shares put in a bottom? When I look at my short-term indicators, it looks like they have as long as the Nasdaq-100 ETF (QQQ) breaks above its 20-day EMA (around 317) and sustains the uptrend:
And even my 5-year weekly chart tells me tech shares bounced off their 30-week moving average (300) and if they get above the 10-week moving average, they might have another run-up:
But the weekly MACD is still down and the daily one is still negative even if it's turning up so that tells me it could be very choppy for tech in the coming weeks and we might see a retest of the recent lows.
Another chart of the Nasdaq I look at is the one-month chart to see critical levels and if we do not see it crossing above 13,600, it's not a good sign:
The truth is tech shares, especially hyper growth Cathie Wood ARK shares, had a huge run-up, there was way too much crowding in these names and I wasn't surprised many of them got slammed hard last week when rates moved up.
And even though the ARK Innovation ETF (ARKK) bounced back this week, it still remains weak and fragile here as the unARKing of the market was brutal last week:
Rates moved up again today with the yield on the 10-year US Treasury note backing up almost 11 basis points to close at 1.63%, a yearly high:
But this time the market didn't go haywire, tech shares sold off initially but only marginally and they came back late in the day.
What was interesting today is the so-called fear index, the CBOE Volatility Index (VIX), actually dropped despite the backup in long bond yields:
What that tells me is the market and its participants have internalized the rise in long bond yields and they have come to accept that it's part of a broader economic recovery story.
S&P 500 up 2.6% this week at an historic high with 10-year yields over 1.6%, highest in over a year? Could it be the market is finally getting comfortable that higher yields is reflective of a stronger, “normalized” economy and not runaway inflation? @CNBC $SPY #markets— Bob Pisani (@BobPisani) March 12, 2021
Still, as Ned Davis Research notes, a 2% 10-year yield could knock 20% off tech stocks:
Surging bond yields sent technology shares sliding into correction territory at one point, and there could be an even more severe sell-off ahead if rates keep going higher, according to Ned Davis Research.
So, it's not at all clear how markets will react if long bond yields keep backing up.
Nonetheless, the selloff in long bond prices (TLT) -- ie. the backup in long bond yields (bond prices are inversely correlated to yields) -- might be overdone in the near term and rates should stabilize around these levels:
If long bond yields keep backing up (ie. long bond prices keep sliding), then we are going to see a pickup in volatility, especially if leveraged funds run into trouble and start indiscriminately de-risking and selling off risk assets.
Remember, bad things happen when yields rise too fast, really bad things.
Of course, the Fed and the ECB know all this and they've been purchasing long bonds.
This week, the ECB announced plans to ramp up bond buying to tackle surging yields:
The European Central Bank has said it expects to increase its bond purchases “significantly” next quarter, after borrowing costs rose in the region.
The ECB opted on Thursday to leave its Pandemic Emergency Purchase Program, or PEPP, unchanged, at a total of 1.85 trillion euros ($2.21 trillion) due to last until March 2022.
However, the central bank’s bond purchases in the first quarter have been lower than usual and the Frankfurt-based institution said it expected to ramp up its purchases going forward.
10-year bund yields cratered, at least initially, and that helped ease the backup in US 10-year yields, at least for a day.
Like it or not, central banks play an integral part in these markets, providing liquidity and backstopping risk taking activity.
The ECB basically told global hedge funds and Wall Street to keep piling on the risk, they're going to ramp up their bond purchases.
And now all eyes are on the Fed after the ECB juiced up the bond yield divergence trade.
It remains to be seen what the Fed does but clearly it will not sit idly by if bond markets go haywire.
Getting back to stocks, this week we saw the Dow take off as the Nasdaq languished and it was mostly owing to the spectacular gains Boeing's shares registered:
And they can continue ripping higher although I suspect they will stall and correct around the 200-week moving average:
Still, I suspect any correction here will be bought hard and if the share price does cross above its 200-week moving average, it will continue ripping higher.
There are plenty of other Dow stocks like Caterpillar (CAT), Disney (DIS) and Goldman Sachs (GS) that are doing exceptionally well this year but they're overextended here and you really need to pick your stocks carefully in all indexes or risk getting hurt.
Anyway, here is how S&P sectors performed this week:
Interestingly, Consumer Discretionary (XLY), Real Estate (XLRE) and Utilities (XLU) led the pack despite the rise in bond yields. Energy (XLE) and Communication Services (XLC) posted marginal gains and lagged the rest of the sectors.
And here are this week's best performing large cap stocks:
You read that correctly, GameStop (GME) was at the top of the pile (unbelievable but true). Boeing wasn't even in the top twenty best performers this week, which goes to show you how strong the markets were.
And forget small cap stocks (IWM), they're continuing to rip higher, making record gains:
There are parts of this market that make me really, really nervous but it's clear Risk On still dominates, for now.
Below, CNBC's "Halftime Report" team is joined by Tom Lee of Fundstrat Global Advisors about his expectations for the markets and economy.
Also, CNBC's Scott Wapner talks with the "Halftime Report" team to break down how they're investing right now.
Lastly, Liz Ann Sonders shares her perspective on the US stock market and economy in this monthly Market Snapshot video. She's great, listen to her insights.