Stocks rose substantially as bond yields halted their advance and retreated. Sectors particularly benefitting from lower rates responded with the largest gains.
The Dow Jones Industrial Average rose 188.11 points, or 0.55%, to close at 34,084.15. The S&P 500 gained 43.44 points, or 1.06%, to end at 4,159.12, and the Nasdaq Composite soared 236 points, or 1.77%, to close at 13,535.74. The biggest gainer on the S&P 500 was energy-management firm Enphase Energy (ticker: ENPH), which saw shares surge 8.5%, benefitting from an analyst upgrade of peer SolarEdge Technologies (SEDG).
The 10-year Treasury yield ended at 1.63% after having popped to as high as 1.68% Wednesday after the disclosure of Federal Reserve minutes. Board members of the central bank discussed reducing the bond-purchasing program. That would reduce bond prices and lift their yields, as economic demand and inflation potentially forces the Fed to alter policy. Higher bond yields reduce the present value of future cash flows, pushing stock valuations lower. The move down in yields Thursday made investors more comfortable buying stocks, even those of companies still growing.
The biggest gainers in stocks confirmed as much. Technology and biotech firms saw shares outperform, with the Nasdaq 100, an index of large-capitalization growth stocks, up 1.9%; the two top index gainers were Chinese internet tech firm NetEase (NTES) and vaccine maker Moderna (MRNA). Apple (AAPL) and Microsoft (MSFT) were the Dow’s biggest and third-biggest gainers, respectively. Rate changes disproportionately affect growth stocks because the companies they represent expect the bulk of their profits to come far into the future, and higher rates erode the value of those future cash flows.
Thursday was “your classic rates fall, buy tech,” Peter Boockvar, chief investment officer of Bleakley Advisory Group. told Barron’s.
But stocks of sectors typically seen as defensive in a volatile market also logged strong gains. The Vanguard Consumer Staples ETF (VDC) saw shares rise 0.80%, and the Utilities Select Sector SPDR ETF (XLU) rose 0.87%. The earnings of large-cap defensive companies are typically steady despite the economic outlook; their shares often underperform when bond yields rise, which signifies strengthening economic demand. Plus, rising yields make the dividend yields of defensive stocks less attractive, so when rates fall, this group can perform well.
Bleakley Advisory’s Boockvar said he owns Coca-Cola (KO) and General Mills (GIS) for clients, stocks which rose 0.89% and 0.48%, respectively. Their dividend yields are 3.1% and 3.2%, respectively.
Sure, jobless claims were better than expected, but investors are now likely to interpret solid economic data as negative for stocks, because it will reinforce the narrative that inflation is here, forcing the Fed’s hand.
“If you get a huge [datapoint] beat, it’s just going to intensify the discussion on taper/not taper [Fed reducing bond buying or not],” Boockvar said.
Going forward, investors should monitor the 10-year Treasury yield to see if it goes above 1.74%, wrote Tom Essaye, founder of Sevens Report Research in a note. That’s the bond’s recent closing high, “and if the 10-year yield breaks those levels we can expect it to become an additional headwind on stocks,” Essaye wrote.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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May 21, 2021 at 04:14AM
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