2023-11-05 12:00:00
Hopes that the rout in government bonds has ended is prompting some investors to return to the U.S. stock market following a months-long slide.
The relationship between stocks and bonds has tightened in recent months, with stocks falling as Treasury yields hit 16-year highs. Higher yields compete with stocks for investment, while increasing the cost of capital for businesses and households.
However, over the past week, this dynamic has reversed, following news of less than expected U.S. government borrowing and signs that the Federal Reserve is nearing the end of its hiking cycle. interest rates.
Yields on 10-year U.S. Treasury bonds, which move inversely to bond prices, are down regarding 35 basis points from 16-year highs reached in October. Meanwhile, the S&P 500 jumped 5.9% over the past week, its biggest gain since November 2022. The index lost regarding 5% from its July peak, but gained by almost 14% since the start of the year.
“Rate stability helps other asset classes stabilize,” said Jason Draho, head of asset allocation for the Americas at UBS Global Wealth Management. “If stocks move higher, investors might start to think they need to chase performance through the end of the year.
Mr. Draho expects the S&P 500 to move between 4,200 and 4,600 until investors determine whether the economy will be able to avoid a recession. The index was recently around 4,365.
Other factors can also work in favor of stocks. Active fund managers’ stock exposure is near its lowest level since October 2022, according to an index compiled by the National Association of Active Investment Managers – a compelling sign for contrarian investors looking to buy when pessimism sets in.
Overall stock positioning tracked by Deutsche Bank fell to a five-month low earlier this week, the firm’s strategists said in a note released Friday, helping fuel a powerful rebound as investors rushed to the market once more.
At the same time, the last two months of the year tended to be a good time for stocks, with the S&P 500 rising an average of 3%, according to data from CFRA Research. The index’s best two weeks of the year, in which it rose an average of 2.2%, began Oct. 22, according to data from Carson Investment Research.
“We had an extremely oversold market in the middle of a strong economy, and the Fed being a little more dovish was the trigger we needed for a rally,” said Ryan Detrick, a strategist in market chief at Carson Investment Research, who believes stocks’ current rebound will take them past their July highs.
Bullish sentiment was reinforced Friday by U.S. jobs data, which showed a slight increase in the unemployment rate and the smallest wage increase in two and a half years, suggesting that the labor market cools, strengthening the case for a status quo from the Fed. The S&P 500 closed up 0.9% on the day.
Of course, many investors are still hesitant to return to the stock market. Tech giant Apple Inc. was the latest of the market’s big tech and growth stocks to report a disappointing outlook on Thursday. The iPhone maker announced holiday sales forecasts below Wall Street estimates. At least 14 analysts have reduced their price targets for the stock, according to LSEG data.
Still, analysts expect third-quarter earnings growth of 5.7% for S&P 500 companies, and more than 81% of the 403 companies in the benchmark index reporting earnings so far exceeded estimates, according to LSEG data.
At the same time, bets on trend reversals in government bonds were losers for most of the year, during which rebounds in the US government bond market were followed by a fall more important. The yield on the 10-year Treasury bond has risen regarding 125 basis points from its lowest level of the year.
Some investors also worry that the “Goldilocks” economy suggested by Friday’s jobs report may not last. Greg Wilensky, head of U.S. fixed income at Janus Henderson Investors, believes that while signs of weaker-than-expected growth are boosting stocks and bonds for now, they might eventually spark concerns regarding a recession .
“Ultimately, ‘good’ moderation might turn into a debate over whether the economy and labor markets are weakening too much,” he said. (Reporting by David Randall; Writing by Ira Iosebashvili, Louise Heavens and Cynthia Osterman)
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