Tech Breaks Down on Higher Bond Yields

 

Hey There Income Hunters,

 

As I mentioned yesterday, the new year has brought the Bond Bears out of hibernation. 

 

As you can see from US 10-year yields chart below, the rate is up almost .20% to the 1.7% level we reached in November and December. 

 

 

This has been the biggest two-day surge since March of 2020.

 

The mega-cap market leaders including, AAPL, MSFT, NVDA, TSLA and GOOGL who have contributed over 50% of the returns in the S&P 500 since the second quarter of 2021 were all down on Tuesday.

 

There was also employment news that signals we could be heading back into stagflation, which would spell additional problems for earnings.

 

Today, we’ll dig deeper into the possibility tech may run into deeper problems ahead. 

As I wrote about to start the year off, the headwinds for growth stocks are substantial and higher long-term interest rates are at the top of the list.

 

Growth stock valuations compete with long duration bonds because of the duration of their cash flows. So, higher bond rates cause two problems:

 

      1. They hurt growth stock valuations because they create an alternative to long duration investors. 
      2. They also dampen growth because of how much debt corporations are carrying.

Stock Market Breadth is Already Weak

 

As you can see below, during the April-to-October period market breadth fell to historic lows:


The fragmentation in the market was incredible during that time …

Especially, when you consider the S&P 500 index was hitting new all-time highs while many sectors were getting destroyed including crypto, solar, meme stocks and biotech, which were all down between 35%-60%.

It will be hard for the Fed to back off from tightening unless inflation drops substantially, which is not going to happen and we’ll take a look at why in a minute …

Or, the market has a meltdown, which forces the Fed to reverse course back and fires up the printing press. 

The Job Market Is Flashing Inflation Problems Ahead

 

On Tuesday, the Bureau of Labor Statistics released the job opening and labor turnover data (JOLTs) report.

 

The JOLTs showed some disturbing news for a Fed that needs to see inflation come down …

 

Yesterday’s report showed that the total number of job openings continues to be above the number of unemployed workers. 

 

As you can see in the chart below, there are 3.7 million more vacant jobs than unemployed workers, confirming that the US labor market has the potential to drive wages even higher:

 

 

The absolute worst news for the Fed would be to see the job market trigger a wage/price spiral.

 

This would mean wages rise allowing workers to pay higher prices, which then allows companies to pass through higher wages and so on.

 

Why Is Everyone Quitting?

 

Quitters soared to an all-time high in November of 4.5 million. 

 

 

Most of the quitting was in the restaurant business, which is understandable … 

 

Although, quitting when we are experiencing a complete pullback in stimulus is a dangerous proposition. 

 

Value Will Continue to Benefit

 

Uncertainty about the Fed and the lack of stimulus for at least Q1 will test investors.

 

Notice the growth-to-value ratio below as measured by the Russell 1000 growth ETF (Ticker: IWF) and the Russell 1000 Value ETF (Ticker: IWD) …

 

 

Bring It Home

 

The next few trading sessions will be key.

 

Will investors step up to purchase bonds as the Fed sells them into the market? That is the trillion dollar question.

 

The Fed is not only selling bonds into the market but the Treasury will be increasing the size of bond auctions and corporations will be issuing trillions of corporate bonds, as well. 

 

Stay tuned this week and I will update you on any internal changes that can give you clues of where the money is flowing.

 

Right now it is rotating into value stocks but if the numbers show a sharp slowdown is ahead then the entire market will be under pressure.

 

Have a great day and as always …

 

Live and Trade with Passion My Friends,

Griff

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