Investors Seem To Be Fretting About Rising Yields, Global Economic Growth

With the resumption of trading in U.S. Treasuries, it looks like the trend of rising yields pressuring equities could continue, even as worries about global economic growth because of trade issues get fresh traction.

The International Monetary Fund (IMF) cut its estimates for next year’s growth in China and the United States, citing the impact from tariffs each country has slapped on the other. The lender also reduced its global growth forecasts for this year and next.

Meanwhile, the yield on the 10-year Treasury hit a fresh multi-year high, seeming to help send equity index futures lower as investors appeared to continue fretting about the potential fallout for the stock market. Higher interest rates can mean higher borrowing costs for corporations, investors, and consumers. They can also make equities, which are considered riskier than bonds and have been at record highs recently, less attractive. 

The market has been used to interest rates being very low for a very long time and basically eliminating one factor that can pressure stocks. That has helped equities bounce back more quickly and more strongly from other pressuring factors, but that paradigm could be shifting. 

Consider watching whether financial stocks continue higher. These tend to do well when rates rise, and market conviction that Treasury yields will maintain their upward trajectory for a sustained period could lead to more strength in the financial sector.

Another thing to potentially keep an eye on is the Cboe Volatility Index (VIX). Wall Street’s main fear gauge is at levels we haven’t seen since June, apparently as investors worry about the potential need to revalue lofty equities prices as yields rise. A VIX that sustains higher levels could be an indication that the market thinks higher yields are here to stay.

In an equities environment that seems to be governed in the short term by interest rates, it was perhaps not so surprising that U.S. stocks ended their first session of the week in a relatively muted fashion Monday, on a day when the U.S. Treasury market was closed for the Columbus Day holiday.

The broad S&P 500 (SPX) recouped most of Monday’s losses to end essentially flat, while the Dow Jones Industrial Average ($DJI) broke a losing streak with a slightly higher close. The tech-heavy Nasdaq Composite (COMP) ended the day above its session lows but closed in the red nonetheless. 

Although volatility, as measured by the VIX, was higher, the market seemed to mostly shrug off some overseas concerns, apparently looking toward the reopening of the Treasury market today. 

Looking Overseas

Much like Columbus and other explorers of yore, investors appeared to be looking overseas.

Earlier declines Monday had come after shares in mainland Chinese indices fell markedly as investors there returned from a holiday. Pressure appeared to come from worry over heightened trade tensions between Beijing and Washington and rising rates in the U.S. 

If rates continue on their upward trajectory, that could decrease the amount of liquidity available to invest in stocks in China or elsewhere. And what money there is for investing arguably might be more attracted to the United States, where the economy is currently going gangbusters.

Meanwhile, Chinese officials appear to be working to stimulate their own economy, but stocks there shrugged off the effort, which involved China lowering the amount of cash banks must keep on hand. 

Troubles for Tech

Troubles in the Chinese market could help explain why the tech heavy Nasdaq was the poorest performing of the three main U.S. indices on Monday and why the information technology sector was by far the biggest loser among S&P 500 sectors, since tech companies may rely on manufacturing and suppliers in China. 

The Nasdaq’s underperformance was also helped by Google’s parent Alphabet Inc. GOOG GOOGL, shares of which faltered after the Wall Street Journal reported Google did not disclose a glitch in its social networking site that gave outside developers potential access to private data. The company said in a blog post on Monday that it is shutting down the social networking site, Google+, for consumers. It also said that it “found no evidence that any developer was aware of this bug … and we found no evidence that any profile data was misused.”

FIGURE 1: Tech Setback Not Its First: The tech sector, shown year to date in this chart, is under pressure and down sharply from recent highs. As the chart shows, this is far from the first time that’s happened this year. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Tech Not Homogenous

Google’s social network never became a serious rival to Facebook, Inc. FB, but both FB and Google have seen how problematic privacy issues can be. That’s one reason why stocks with exposure to social networking sites can be different animals for investors than say, companies that make processors, even though both are considered tech companies. There’s even substantial difference within the FAANG stocks — FB, Apple Inc. AAPL, Amazon.com, Inc. AMZN, Netflix, inc. NFLX, and Google -- themselves. So it would seem that investing in companies involved in technology is a case of needing to do your homework. 

Staging a Rally

Real estate, utilities and consumer staples have been staging a bit of a comeback. The three rate-sensitive sectors were the biggest gainers on Monday. This may be a case of investors looking at three sectors that are among the poorest performing over the past year and thinking now is a good time to buy. Such buying could suggest that at least some investors think the momentum in rising Treasury rates could peter out, and they’re trying to get in before others begin to think the same thing.

Consumer Sentiment and Spending

It could be interesting this week to compare numbers scheduled for release on prices paid by consumers and the confidence consumer have. On Thursday, the government is scheduled to release its report on consumer prices, with the headline index expected to show a rise of 0.2 percent in September, according to a consensus of economists provided by Briefing.com. The following day, investors are scheduled to get a look at the University of Michigan Consumer Sentiment Index for October. The previous month’s preliminary reading of 100.8 was the second highest since 2004 and came in above expectations. As Briefing.com put it at the time, “the pickup in sentiment was widespread across all major socioeconomic groups, which is a good underpinning for solid consumer spending activity.” 

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.