The Covid stimulus package has passed and bulls are celebrating. The Dow and S&P both soared in response to the news.
Happy days are here again.
Or are they?
Treasury yields are rising still. The 10Y rate just eclipsed 1.60%.
But many analysts have already called an end to soaring yields, even though they’re up again this morning.
“Basically, I think rates have temporarily made the most of the move and should be more stable in the next few months, which makes it safer to be in stocks for now,” said hedge fund manager David Tepper.
Tepper believes that Japan is going to start buying U.S. government bonds again now that they’re cheaper.
“That takes a major risk off the table, and it’s very difficult to be bearish,” he explained.
Treasury yields remain up on the day, however, meaning that the Japanese buying hasn’t happened quite yet.
Tepper likes bellwether stocks (FAANG companies in particular) as the market returns to its winning ways.
Several Wall Street banks agree, also claiming that rate-driven fears have largely been put to bed.
“We see higher rates largely as a function of earlier and stronger than expected economic recovery and supportive of our positive equity outlook,” said Dubravko Lakos-Bujas, JPMorgan’s chief U.S. equity strategist, in a note.
Reopening sensitive Dow components are beating the field this morning. They’ve ultimately lifted the rest of the market in doing so. Tech stocks, many of which flourished during the pandemic, are down on the day as an economic reopening approaches.
But Morgan Stanley’s Mike Wilson thinks that it’s only a matter of time until growth stocks (mostly tech in this case) catch-up with the rest of the market.
“The bull market continues to be under the hood, with value and cyclicals leading the way. Growth stocks can rejoin the party once the valuation correction and repositioning is finished,” Wilson said.
For the time being, though, growth should continue to take a backseat to value. The chart above plots the Russell 1000 Growth ETF (NYSE: IWF) against the Russell 1000 Value ETF (NYSE: IWD). As growth outperforms value, it’s reflected by positive movement in the chart.
When value beats growth, the opposite happens.
And for weeks, value teased a major takeover. The IWF/IWD ratio bounced off key support several times.
In February, though, the bearish breakout finally happened. Value surged while growth sunk, kicking off what appears to be a longer-term period of value dominance.
Hedge funds seem to think that the relationship’s going to change relatively soon, likely paired with a slump in yields.
But until that actually starts to happen, the rotation into value shares should persist. Stimulus and reopening hopes are likely to keep sentiment skewed toward certain stocks.
And, more importantly, that trend should suppress “stay-at-home” tech shares as the U.S. gets over Covid.
So, don’t take Wall Street’s word as gospel just yet. Anything could happen if yields don’t play nice – something that’s a legitimate possibility if last week’s rate spike is any indication.
