Stock investors refocus on rates trade

Stock investors refocus on rates trade

Wall Street fears that interest rate trading could send stocks lower again.

The 10-year Treasury yield (^TNX) has increased by about 25 basis points in the last 10 days alone. It now hovers around 4.32%, just below levels that Morgan Stanley chief investment officer Mike Wilson recently noted could be a critical level for stock investors.

“We view 4.35% of the 10-year U.S. Treasury yield as an important technical level to watch for signs that rate sensitivity may be increasing for stocks,” Wilson wrote in a note to clients on Sunday. .

Bank of America’s March survey of global fund managers, released Tuesday, shows 40% of managers expect bond yields to fall, down from 62% seen in December. This marks the lowest performance expectations fall seen last year.

Wilson noted that large caps have been less rate sensitive recently. “Small caps are likely to demonstrate greater rate sensitivity than large caps if yields rise,” he said.

This strength of large caps, Wilson points out, has manifested itself in the recent expansion of the marketwhich retained the S&P 500 (^GSPC) close to records despite the market reduction its bets on rate cuts by the Federal Reserve. Sectors like materials (XLB) were recently bid on while the Russell 2000 Small Cap Index (^RUT) has continued to be late.

The key for stock markets will be continued rate uncertainty. Many strategists told Yahoo Finance For a full broadening of the stock market rally to occur, investors will likely need to be more confident in the Federal Reserve’s interest rate plans. The central bank will announce its next policy decision on Wednesday.

Even though markets aren’t expecting an interest rate cut, investors will likely get some clarity on the Fed’s thinking from its summary of economic projections.

The version includes the “dot plot“, which describes policymakers’ expectations about the direction interest rates might take in the future. In December, the dot plot watch Fed officials plan three interest rate cuts this year. But after several inflation reports hotter than expected And no sign of economic slowdowneconomists have warned that the Fed may plan fewer cuts.

“The potential removal of an expected cut would be viewed as a hawkish move by the market, putting upward pressure on rates and the (US dollar), all else being equal,” the team wrote on Wednesday of Bank of America rates strategy in a research note.

Kristy Akullian, senior investment and portfolio solutions strategist at BlackRock, told Yahoo Finance Live that part of the stock market reaction one might expect from a change in Fed rate cut expectations was probably “taken into account”. But sectors other than large-cap stocks could still feel some pain.

“This may be important for lower-quality segments of the market,” Akullian said. “So if we look at small caps and highly leveraged companies, they have struggled this year and I think they can continue to struggle.”

Stock investors refocus on rates trade

WASHINGTON DC, UNITED STATES – MARCH 6: US Federal Reserve Chairman Jerome Powell delivers remarks during the House Financial Services Committee hearing at the Rayburn House Office Building in Washington DC, USA United States, March 6, 2024. (Photo by Celal Gunes/Anadolu via Getty Images) (Anadolu via Getty Images)

Josh Schafer is a reporter for Yahoo Finance. Follow him on @_joshschafer.

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