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The TINA mantra — there is no alternative — isn’t correct anymore.
The swift and violent rise in bond yields has meant that equities are no longer the obvious choice to make on a relative valuation basis. The chart here shows that the dividend yield on the S&P 500 is now below that of the 10-year Treasury yield, the benchmark security for all valuation.
Arguably, interest rates could be much higher. Hedge fund giant Man Group performed a regression analysis to try to discern where the stock and commodities markets were signaling where the 10-year should be.
As dovish as Federal Reserve officials including Chair Jerome Powell and Vice Chair Richard Clarida were this week, none of them made the case for increasing the rate of purchases of bonds. The rollout of COVID-19 vaccines and the prospect of further U.S. stimulus have markets convinced the economy is about to heat up. “Despite the Fed’s massive ongoing Treasury purchases, it is highly likely we have entered a bond bear market,” said Mike O’Rourke, chief market strategist at JonesTrading. “Treasuries are getting cheaper every day, expect stocks to follow bonds.”
Data from Bank of America show the current bond market selloff rivals other notable fixed-income declines.
Guild Investment Management, a Los Angeles investment adviser, forecasts the 10-year yield will reach 1.75% with a few months, and it notes inflation already is visible in food and industrial inputs. That said, the firm doesn’t recommend a defensive posture.
“With high fiscal and monetary stimulus and a recovering global economy, investors should look for growth themes and inflation beneficiaries,” the firm says in a presentation. “Small vs large, cyclical vs defensive, emerging markets, commodities, rationally valued innovation.” Good luck, perhaps, finding that last one.
The best asset classes to use as portfolio diversifiers to rising bond yields are still value stocks and financials, according to Matthew Miskin, co-chief investment strategist at John Hancock Investment Management, who adds that regional banks are most leveraged to rising bond yields.
The buzz
The Senate parliamentarian ruled a minimum-wage hike cannot be part of the stimulus package, which means that either the language has to be dropped for the measure to be passed on a majority basis, that the broader bill needs a filibuster-proof majority, or that it is a recast as a tax measure.
Data on personal income, consumer sentiment, and the Chicago-area purchasing managers index are due for release.
Salesforce.com CRM, -3.90%, the database software firm that is part of the Dow Jones Industrial Average, slipped 3% in premarket trade as it guided for 2021 earnings below Wall Street estimates.
Virgin Galactic SPCE, -8.41% fell 12%, after saying its next spaceflight will be delayed until May. Mortgage provider Rocket RKT, -2.07% jumped 8%, after declaring a special dividend as its fourth-quarter revenue more than doubled.
Beyond Meat BYND, -5.46% rose 3%, after the plant-based meat provider landed deals with McDonald’s MCD, -1.09% and Pizza Hut owner Yum Brands YUM, +0.02%. Etsy ETSY, -5.51% rose 8%, as the online arts seller reported stronger-than-forecast earnings.
The market
U.S. stock futures ES00, +0.05% NQ00, +0.14% traded lower after Thursday’s massive 2.5% slide for the S&P 500 SPX, -2.45% and 3.5% dunking of the Nasdaq Composite COMP, -3.52%.
The yield on the 10-year Treasury TMUBMUSD10Y, 1.477% slipped to 1.48%. Gold GC00, -1.02% and in particular bitcoin futures BTC.1, -4.92% were both lower.
The chart
There is nothing investors like more than chasing higher prices, as the latest fund flow data show. Investors poured $46.2 billion into global stock funds — the third-highest ever — and a net $7.1 billion into bond funds in the week ending Wednesday.
Random reads
Soccer star Zlatan Ibrahimović criticized basketball star LeBron James for social activism.
Queen Elizabeth II said reluctant vaccine takers “should think about other people rather than themselves,” as she said receiving one was “very quick.”
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