Traders work on the trading floor of the New York Stock Exchange.
Stocks could be hurt in the coming week from quarter-end trading as pension funds and other large investors buy bonds and sell stocks to balance their portfolios.
The dramatic rise in bond yields this quarter is causing fund managers to shift their holdings to make up for the lack of bond holdings.
The focus in the coming week could be on the overall economy. The March employment report is expected on Friday, and the White House infrastructure plans are expected to be released on Wednesday. There is also ISM manufacturing data released on Thursday.
The March job report is scheduled for a morning when the stock market is closed for Good Friday. However, bonds trade for half a day, ending at 12:00 noon. Economists estimate that 630,000 jobs were created in March and the unemployment rate fell from 6.2% to 6%, according to the Dow Jones.
President Joe Biden is expected to announce details of his $ 3-4 trillion infrastructure plan in Pittsburgh on Wednesday. However, strategists say it is too early to say what the plan might look like or how big it will be in its final form.
Stocks were higher for the past week while government bond yields were less volatile. The closely observed 10-year ratio was 1.67% on Friday after 1.75% the previous week. Yields are moving against price and strategists expect rates to fall further over the coming week as investors rebalance their holdings.
“It’s the last week of the quarter so there can only be too much noise,” said Peter Boockvar, chief investment strategist at Bleakley Advisory Group. “Of course we will keep an eye on the bonds. The 10-year period now seems to be in a range of 1.60% to 1.70%. I think people are just trying to get a foothold here. They are trying to to find out. ” out.”
Some strategists say quarter-end trading for stocks, especially big-cap tech, could be positive as rates temporarily stopped rising.
Inventories are higher in the quarter to date. The S&P 500 gained 1.6% over the course of the week and 5.8% in the quarter to date. The Dow was up 1.4% for the week and up 8% in the first quarter. The Nasdaq lagged behind, falling 0.6% for the week and 1.9% for the quarter.
Bonds were much more dramatic in the quarter. The 10-year reference return rose from 0.93% at the end of last year.
“It’s in the driver’s seat right now,” said NatWest’s Blake Gwinn of the 10-year return. The 10 year rate of return is the most widely used rate of return as it affects mortgages and other major financing rates.
Gwinn, head of US interest rate strategy, said he had changed his view of the 10-year deadline and now expects the yield to hit 2% from 1.75% by the end of the year. In the short term, however, the yield could fall further as large funds buy Treasuries. Japanese investors are also expected to be active buyers towards the end of the year on Wednesday.
“If anything, we really hope that returns will continue to drop a little lower so that we have a better place to get back into shorts,” he said.
Gwinn said he is focused on the Biden infrastructure plan and doesn’t think it’s still priced in in the market. The $ 1.9 trillion fiscal plan just signed by the president was a driver of bond yields as investors weighed the expected surge in economic activity and the associated higher debt levels.
“The Biden plan is my biggest risk to the treasury market right now. I don’t have the full Biden plan priced into my … forecast this year,” he said. “If we suddenly get started quickly and that comes together in the second quarter, I’ll have to rethink my 2% target.”
Gwinn said the market had “fiscal fatigue”.
“There are a lot of doubts and uncertainties about how it will pass, when it will pass and whether it will pass … it is not tangible enough,” he said.
The plan is expected to span several years, and the Democrats are expected to seek tax increases to pay for it.
The rotation into cyclical and value stocks is expected to continue in the next quarter. Energy and Finance had the best results in the first quarter, up 33% and 16.5% respectively. Tech was up 1.7% but outperformed utilities and consumer staples.
“I think certain parts of the market have a lot of upside potential, but some of it may come at the expense of growth stocks,” said Dan Suzuki, vice CIO, Richard Bernstein Advisors. He also assumes that growth stocks will continue to react negatively to rising interest rates and positively to falling ones. This trade has decoupled a bit in the past week.
“It won’t go one-on-one with every wobble,” he said. “I think the base behind this is real. If you think rates will climb to 2% by the end of the year, that’s really bad for expensive high-growth names. Markets care less about absolute levels than direction The higher the interest, the worse it is for high multiple stocks. “
Suzuki said the rise in interest rates is pushing some of the foam off the market. Special purpose vehicle stocks (SPACs) had risen by more than 5% on average on their first few days of trading in February and posted no profit in March, according to a University of Florida finance professor.
“As we see the economy getting better and better at an incredibly fast rate, especially as you add some extra momentum, you have companies that will benefit the most from that acceleration and that will grow 2X, 3X plus.” he said. “To her credit, those high, multi-growth stocks have been so robust last year … Tech earnings growth comes in mid-teens next year, but again the more cyclical parts of the economy – energy, materials, industry, small caps as a result As they rebound, they will see much stronger earnings growth this year.
Calendar for the week ahead
Merits: Vaxcyte, Cal-Maine Foods
Merits: Lululemon Athletica, Chewy, McCormick, BioNtech, FactSet, Blackberry, PVH
9:00 am S&P / Case-Shiller property prices
9:00 a.m. FHFA real estate prices
10:00 am Consumer Confidence
12:00 pm Raphael Bostic, Atlanta Fed President
2:30 p.m. John Williams, President of the New York Fed
Merits: Walgreens Boots Alliance, Micron, Dave & Buster, guess
8:15 am ADP employment
9:45 am Chicago PMI
10:00 a.m. Pending home sales
10:45 am Bostic from Atlanta Fed
8:30 am Initial jobless claims
9:45 am Manufacturing PMI
10:00 am ISM Manufacturing
10:00 a.m. building expenses
1:00 p.m. Philadelphia Fed President Patrick Harker
Good Friday holiday
8:30 a.m. Employment Report