The bond market did it—though just what “it” is remains unclear.
Here’s what we know. This past week’s economic data were spectacular. Weekly jobless claims tumbled to 576,000, the lowest level of the pandemic, consumer inflation rose in March at a quicker-than-expected 2.6% year over year, and March’s retail sales, boosted by government payouts, surged 9.8% over February’s. The 10-year Treasury yield responded by falling as low as 1.536% on Thursday, its lowest trading level since March 12—a sign, perhaps, that the bond market is concerned about the future path of economic growth.
Normally, we’d be worried about the bond market’s message because we all know that it’s always right. This time, we’re not so sure. Stocks had a great week, with the
Dow Jones Industrial Average
gaining 400.07 points, or 1.2%, to 34,200.67, while the
S&P 500 index
rose 1.4%, to 4185.47, and the
advanced 1.1%, to 14052.34. The S&P 500 and Dow closed the week at new highs.
Stocks weren’t the only gauge that suggested that growth was the least of the market’s worries. The amount of inflation priced into 10-year Treasury inflation-protected securities, or TIPS, remained relatively unchanged at around 2.33% for much of the week. The “break-even” rate should have fallen if investors were worried about slower growth. Other pro-growth metrics also failed to roll over. The ratio of the price of copper to the price of gold has risen to near its highest level since 2018, another sign that investors aren’t worrying about growth yet. “The…drop in the 10-year bond yield…was curious, but we wouldn’t read too much into it,” writes Michael Darda, chief economist at MKM Partners.
Still, something caused it to drop. Some observers pointed to U.S. health regulators’ decision to pause the use of the
Johnson & Johnson
vaccine, adding to the risk that the fight against Covid-19 goes sideways. The Biden administration placed new sanctions on Russia, increasing tensions and perhaps spurring demand for Treasuries as a haven. It’s also possible that after yields nearly doubled to start the year, investors were simply waiting to see that the move higher was over before buying again. Of course, nearly everyone was predicting a 2% yield on the 10-year, while often forgetting that rarely does anything in financial markets move in a straight line.
More than that, however, the drop in the 10-year yield could be a sign that the bond market is finally starting to take Federal Reserve Chairman Jerome Powell at his word: The Fed won’t raise rates even if the data suggests it should.
“The market tested the Fed a couple of weeks ago,” says Katie Nixon, chief investment officer for wealth management at Northern Trust. “Now, the bond market is believing the Fed.”
And with bond yields no longer rising, the market has become a blank slate on which investors can declaim their views. Some investors believe that inflation is coming, so they’re buying cyclical stocks, observes Evercore ISI technical analyst Rich Ross, while others believe inflation will be transitory—to borrow the Fed’s favorite word—and are buying growth stocks. Still more have no clue who is right—and are still worried about the coronavirus—so they’re buying defensive stocks.
And guess what? It’s all working. The
iShares Russell 1000 Value
exchange-traded fund (ticker: IWD) gained 1.2% this past week, while the
iShares Russell 1000 Growth
ETF (IWF) rose 1.8% and the
Invesco S&P 500 Low Volatility
ETF (SPLV) climbed 2%. “As the ‘pace of rates slows, the case for most everything grows,’” Ross writes.
That won’t always be the case, however. Rather than watching yields, investors should keep an eye on the price of oil, according to Thomas Lee, head of research at Fundstrat Global Advisors, who points to the connection between oil prices and the reopening trade. When oil prices ripped from less than $30 a barrel in April 2020 to their high of $68 on March 8, 2021, economically sensitive sectors followed suit. But when oil tumbled to $59 on April 13, they faltered.
Now, oil is picking up steam again, and if it continues to rise, cyclical stocks should, too. “In many ways, the path of oil could be a key determinant to the leadership of markets over the next few months,” Lee explains.
This time, it may even be better than the bond market.
Read the rest of The Trader column: 4 Electric-Vehicle Charging Stocks at Fire-Sale Prices
Write to Ben Levisohn at Ben.Levisohn@barrons.com