Before The Bell
So-called sector rotation continues on Wall Street, with recent sessions seeing a move away from so-called growth stocks, which include high-profile technology names, such as Apple (AAPL) and Microsoft (MSFT), and into more economically sensitive value areas like energy, airlines, and steel. These latter categories have been among the stock market's strongest areas recently, largely on optimism about the U.S. business outlook, with yesterday's mixed session continuing this split pattern, especially early in the day. Rising Treasury yields, reflecting inflation worries, are behind the uneven market trends.
In news released earlier this morning, the Labor Department reported that weekly jobless claims had jumped by 45,000 to 770,000 in the latest week. That number was well above the 700,000 tally expected. Still, Treasury note yields, which rose yesterday on inflation fears, have climbed further today. Later this morning, the Conference Board will release the Index of Leading Economic Indicators. That composite is expected to show a 0.3% increase for February. In other news, the Philadelphia Fed manufacturing survey surged last month, but so did prices paid.
Regarding Treasury yields, they have now more than quadrupled in the past year, surging from less than 0.40% to 1.74% this morning. This spike upward moderated briefly in the afternoon yesterday, as the Federal Reserve ended its latest FOMC meeting with no change in interest rates (specifically the federal funds target). At that time, the Fed suggested that inflation was still below the bank's target of 2%, but that it would likely exceed that level by the end of this year, and that the economy was picking up steam. The market liked this conclusion and stocks rallied as the session wound down.
It would seem that Wall Street exhaled a sigh of relief following the meeting in which the Fed reiterated that it saw near-zero interest rates until at least 2023, despite rising inflation concerns. Fed Chair Jerome Powell maintained that the bank wants to see inflation move moderately above 2%, and also said that the recent move higher in yields was orderly. This last point likely explains the Street's positive reaction to the FOMC meeting. Importantly, the Dow Jones Industrial Average closed at an all-time high, edging above 33,000. This morning, though, the renewed rise in yields suggests some revised thinking regarding the Fed and perhaps the stock market outlook today.
Finally, yesterday saw some disappointing economic metrics, as housing starts (down 10.3%) and building permits surprisingly dipped in February. Mortgage applications also moved lower amid the recent rise in borrowing rates. Meantime, gold was higher and oil prices were lower. In earnings news, homebuilder Lennar Corporation (LEN) blew out sales and earnings results and the stock jumped in price on the day.
In sum, the stock market continues to largely perform well, but we caution that Treasury yields could soon become competition for equities, particularly if they reach 2.00%, or so, and that even at present, the stock market is priced for near perfection. So, some caution is in order, in our opinion.
– Harvey S. Katz, CFA
At the time of this article's writing, the author had positions in Apple (AAPL).
