Will Yields Keep Rising?

Federal Reserve Chairman Jerome Powell

Stocks tumbled this morning as the rough start to the year got even worse. The Dow, S&P, and Nasdaq Composite all fell, scorching lower for significant losses. Today’s dip was likely driven by rising yields, which spiked again after already jumping higher last week. The 10-year Treasury yield hit 1.8% this morning, exceeding the pandemic high of 1.765% in the process.

This caused a slump in Big Tech shares, the majority of which endured heavy selling. Facebook-parent company Meta (NASDAQ: FB) was down 4% alongside chipmaker Nvidia (NASDAQ: NVDA). Amazon (NASDAQ: AMZN) dropped, too, falling 3%.

But it wasn’t just the market’s top tech shares that sunk. Over 70% of the S&P’s 500 stocks were down as of noon.

“Stocks are getting pulverized as tech extends its slump, but investors are forgetting to rotate, and the cyclical/value community is getting hit too as a result,” said Vital Knowledge’s Adam Crisafulli in a note to clients.

“It’s hard to blame any incremental news, and instead the same themes and trends as the last few weeks continue to weigh heavily on sentiment, specifically the withdrawal of stimulus and the effect this will have on equity multiples.”

And though Crisafulli’s take on investors “forgetting to rotate” is a little tongue-in-cheek, it’s also accurate. Value stocks beat growth to end the year. Now, both types of companies are down big as sentiment crumbles.

“The surge in rates since early December has crushed the valuation of stocks with high growth and low margins, but a well-ordered progression of Russell 3000 stocks implies further repricing,” wrote Goldman Sachs chief strategist David Kostin.

“We have previously shown the speed of rate moves matters for equity returns. Equities typically struggle when the 5-day or 1-month change in nominal or real rates is greater than 2 standard deviations. The magnitude of the recent yield qualifies as a 2+ standard deviation event in both cases.”

If rates climb further and at their current pace, growth stocks (ie, tech) will continue to see the worst of the losses, especially now that investors are expecting a Fed balance sheet reduction in March – something traders learned in the December FOMC meeting minutes release last week.

“That hawkish surprise hit the broad markets on Wednesday but especially high-growth and high-[price-to-earnings] tech stocks, as the prospects of the Fed aggressively tightening are most negative for high-growth/high-PE names,” said Tom Essaye, founder of the Sevens Report.

The “hawkish surprise” of a Fed balance sheet reduction may get even more hawkish in the next few days. The December Consumer Price Index (CPI) comes out on Wednesday, one day before the December Producer Price Index (PPI) is released. Both the CPI and PPI will provide the Fed with key inflation data heading into the January FOMC meeting, scheduled for January 25th-26th.

If inflation looks hotter than expected again, Fed Chairman Jerome Powell may seek to crank up the hawkish pressure once more. Ahead of that meeting, though, Powell’s set to testify before a Senate panel in his nomination hearing tomorrow. And while Powell will undoubtedly be confirmed, his testimony could provide significant monetary policy insight just days before a pair of critical inflation data releases.


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