Stocks could be buffeted by end-of-quarter trading in the week ahead, as pension funds and other big investors buy bonds and sell stocks to rebalance their portfolios.
The dramatic move higher in bond yields this quarter sets up fund managers to shift their holdings, to make up for the shortfall in bond holdings.
The focus in the coming week could turn to the overall economy, with the March employment report expected Friday and the White House’s infrastructure plans expected to be unveiled Wednesday. There is also ISM manufacturing data released on Thursday.
The March jobs report is scheduled for a morning when the stock market is closed for the Good Friday holiday, but bonds will trade half a day, ending at noon. Economists expect 630,000 jobs were added in March, and the unemployment rate fell to 6% from 6.2%, according to Dow Jones.
President Joe Biden is expected to unveil details of his $3 trillion to $4 trillion infrastructure plan on Wednesday in Pittsburgh, but strategists say it is too soon to say what form the plan could take or how large it will be in its final form.
Stocks were higher in the past week, while Treasury yields were less volatile. The closely watched 10-year was at 1.67% Friday, down from 1.75% in the prior week. Yields move opposite price, and strategists expect rates to continue to slip in the coming week as investors rebalance their holdings.
“It’s the last week of the quarter so there could be just a lot of noise related to that,” said Peter Boockvar, chief investment strategist at Bleakley Advisory Group. “Obviously, we’ll be keeping an eye on bonds. The 10-year now seems to be in a range of 1.60% to 1.70%. I think people are just trying to find their footing here. They’re trying to figure it out.”
Some strategists say the quarter-end trade could end up being positive for stocks, especially big cap tech, since rates have stopped moving higher temporarily.
Stocks are higher for the quarter so far. The S&P 500 was up 1.6% for the week and up 5.8% for the quarter to date. The Dow was up 1.4% for the week, and has an 8% gain for the first quarter so far. The Nasdaq has been the laggard, falling 0.6% for the week and up 1.9% for the quarter.
Bonds have staged a much more dramatic move for the quarter with the benchmark 10-year yield rising from 0.93% at the end of last year.
“It’s in the driver’s seat right now,” said NatWest’s Blake Gwinn of the 10-year yield. The 10-year is the most widely followed yield since it influences mortgages and other key financing rates.
Gwinn, head of U.S. rates strategy, said he changed his view on the 10-year and he now expects the yield to reach 2% by year-end from 1.75%. But in the near term, he said, the yield could continue to fall as big funds buy Treasurys. Japanese investors are also expected to be active buyers around their year-end, which is Wednesday.
“If anything, we’re really hoping it continues to push yields a little lower, so it gives us a better spot to get involved in shorts again,” he said.
Infrastructure plan
Gwinn said he is focused on the Biden infrastructure plan and does not believe it is yet priced into the market. The $1.9 trillion fiscal plan, just signed by the president, was one driver of bond yields, as investors weighed the anticipated bump in economic activity and higher debt levels it will bring.
“The Biden plan to me is the biggest risk for the Treasury market right now. I don’t have what is the full Biden plan happening this year priced in to my … forecast,” he said. “If all of a sudden we start moving quickly on that, and that starts coming together in Q2, I’m going to have to reconsider my 2% target.”
Gwinn said the market has “fiscal fatigue.”
“There’s a lot of doubt and uncertainty about how it’s going to be passed, when it’s going to be passed and whether it’s going to be passed … It’s not tangible enough,” he said.
The plan is expected to span multiple years, and Democrats are expected to seek tax hikes to pay for it.
Rotation
The rotation into cyclicals and value stocks is expected to continue into the next quarter. For the first quarter so far, energy and financials were the best performers, up about 33% and 16.5% respectively. Tech was up 1.7%, but it was a better performer than utilities and consumer staples.
“I think certain parts of the market have plenty of upside but part of that may come at the expense of the growth stocks,” said Dan Suzuki, deputy CIO at Richard Bernstein Advisors. He also expects growth stocks to continue to react negatively to rising interest rates and positively when they fall. That trade decoupled somewhat in the past week.
“It’s not going to match one for one with every wiggle,” he said. “I think the basis behind it is real. If you think rates are going to get up to 2% by the end of the year, that’s really bad for expensive high-growth names. The markets care less about absolute levels and more about direction. The higher rates go, the worse it is for high multiple stocks.”
Suzuki said the rise in rates is knocking some of the froth out of the market. The stocks of special purpose acquisition companies, or SPACs, had been jumping on their first days of trading in February, averaging more than 5% gains, and saw no gain in March, according to data from a University of Florida finance professor.
“As we’re seeing the economy get better and better at an incredible fast rate, especially when you add on stimulus, you have companies that are going to benefit most from that acceleration, that are going to be up 2X, 3X plus,” he said. “To their credit, those high multiple growth stocks were so resilient last year … Tech earnings growth is coming in at mid-teens next year, but again, the more cyclical parts of the economy — energy, materials, industrials, small caps, they’re going to put up much stronger earnings growth this year as a result of the recovery.