Another day, another new all-time high for stocks. The S&P 500 was lifted by a tech rally this morning that put the index into uncharted waters. Treasury yields slid, along with value stocks, as the market’s top growth names continued their climb.
The moderate-term rotation into value shares – the one Wall Street’s long been predicting – remains on hold despite analysts’ refusal to let it go.
“We’re still in probably the early parts of the expansionary cyclical after recovering from that recession,” said Omar Aguilar, Charles Schwab chief investment officer of passive equities and multi-asset strategies.
“We’ve started to see cyclical trades playing a big role in the early part of the cycle. Normally what happens at this stage is you continue to see […] the cyclical component will continue to drive leadership into the second part of this year into next year.”
And though the broader market is up (as reflected by the S&P), the real story has been that of a tech recovery. The Dow, for example, stalled over the last few weeks all while tech stocks roared. Consumer cyclical companies have chopped every which way, barely gaining any ground since mid-February.
But if those tech stocks start to lose steam, too, the general market is likely to slump. And possibly in a major way.
Worse-than-expected weekly jobs data is weighing heavily on investors as well after 744,000 Americans filed first-time unemployment claims last week. Dow-polled economists expected only 694,000 jobless filings by comparison.
March saw a huge jobs report “beat” that sent the indexes soaring on Monday. As a result, last week’s data has done little to dissuade strategists.
“The jump in jobless claims is disappointing but doesn’t change our view that the next few months will see huge job gains as the economy continues to reopen,” explained Jeff Buchbinder, equity strategist at LPL Financial.
“In fact, it wouldn’t shock us to see employment return approach pre-pandemic levels by the end of this year.”
Many Wall Street firms share a similar viewpoint. President Joe Biden’s $2 trillion infrastructure plan, which includes a corporate tax rate increase to 28%, is one of the many reasons for this widely held belief. Biden says he’s willing to negotiate the tax hike to get a deal done.
A continued jobs boom coupled with aggressive fiscal policy should apply upward pressure to yields moving forward.
But what if Biden’s bill doesn’t arrive in a timely manner? Some analysts say it won’t be here until late in the year.
And with a long summer ahead of investors, plenty could go wrong.
Especially in tech if yields spike again.
“It is not unrealistic to think that there are some who are hedging the idea that some modest selling could spiral into something more meaningful in late summer/early fall,” Steve Sosnick, chief strategist at Interactive Brokers, said.
“Until this summer, the infrastructure bill and any associated tax increases are mostly theoretical. That debate is likely to heat up and become something potentially tangible this summer.”
There’s likely to be plenty of uncertainty as Congress negotiates Biden’s proposal. And, as a result of that uncertainty, both growth and value stocks seem at risk.
Of course, the Fed’s still intent on keeping things “loosey-goosey” with its bond-buying programs. But even then, that may not be enough to save stocks from an unexpected shift in yields.
With so many signals pushing and pulling on the market, it’s no wonder that the S&P looks a little stuck. Tech may need to keep rising if new S&P highs are to be made.
And if the sector doesn’t climb further, look out for another broad correction as Wall Street declares the value rotation back “on,” only for trends to flip yet again a few weeks later.
