The relationship between stocks and bonds has been a tight one in recent months, with equities dropping as Treasury yields jumped to 16-year highs
Expectations that a rout in Treasuries has run its course are drawing some investors back into the U.S. stock market following a months-long selloff.
The relationship between stocks and bonds has been a tight one in recent months, with equities dropping as Treasury yields jumped to 16-year highs. Higher yields offer investment competition to stocks while also increasing the cost of capital for firms and households.
Over much of the last week, nevertheless, that dynamic has reversed, after news of smaller than expected U.S. government borrowing and signals that the Fed is approaching the end of its rate hiking cycle.
Yields on the benchmark 10-year US Treasury, which move inversely to bond prices, are nearly 35 bps lower from 16-year highs reached in October. In the meantime, the S&P 500 soared 5.9 per cent in the past week, its biggest gain since November last year. The index is off nearly 5 per cent from its July high, though around 14 per cent higher YTD.
The stability in rates is helping other asset classes find a footing, said Jason Draho, head of asset allocation Americas at UBS Global Wealth Management. If equities rise you may find investors beginning to feel as if they need to chase performance through the end of the year.
Draho expects the S&P 500 to trade between 4,200 and 4,600 until investors determine whether the economy will be able to avoid a recession. The index was recently near 4,365.
Other factors may also be working in stocks’ favour. Exposure to equities among active money managers stands near its lowest level since October last year, according to an index compiled by the National Association of Active Investment Managers – a compelling sign for contrarian investors who seek to purchase when pessimism rises.
Aggregate equity positioning tracked by Deutsche Bank dropped to a five-month low earlier in the week, the company’s strategists said in a Friday note, helping fuel a powerful increase when investors rushed back into the market.
At the same time, the last two months of the year have tended to be a strong period for stocks, with the S&P 500 increasing at an average of 3 per cent, as per data from CFRA Research. The best two weeks of the year for the index, during which it has gained an average of 2.2 per cent – kicked off on October 22, according to data from Carson Investment Research.
We had an extremely oversold market in the midst of a strong economy, and the Federal Reserve coming out a little more dovish was the kindling we needed for a rally, said Ryan Detrick, chief market strategist at Carson Investment Research, who believes the current bounce back in stocks will take them beyond their July high.
Bullish sentiment received another boost on Friday from U.S. employment data, which showed a marginal gain in the unemployment rate and smallest wage rise in 2-1/2 years, indicating that the labour market is cooling, strengthening the case for the Fed to stay its hand. The S&P 500 ended 0.9 per cent higher on the day.
