(Bloomberg) – A presidential election that some consider the most important of all time has lost its ability to sway stock investors in obvious ways. Instead, they are transfixed by another drama: the rise in treasury interest rates.
In a week when benchmarks were virtually idle, rate-sensitive stocks saw signs of an impact on the bond market after rising yields after 10 years. Banks whose stocks were stuck for months jumped and left them ready for the best month in four years. Home builders who have skyrocketed on low mortgage costs reversed course and fell.
In a broader sense, the uptrend in returns helped the fuel industry, whose fate is tied to a rapid economic recovery from the pandemic sometimes referred to as the reflation trade. While the S&P 500 meandered for a second week, economically sensitive portions of power producers and smaller businesses took over the lead of recession-proof groups like Technology.
“In my opinion, this is the biggest story, and not just the result of the elections or the tax incentives,” said Andrew Slimmon, senior portfolio manager, Morgan Stanley Investment Management. “It has more to do with the market starting to praise, that the economy will be better off next year.”
The S&P 500 was pushed down by technology stocks, falling 0.5% in five days. This was the first weekly decline in four days. The tech-heavy Nasdaq 100 index was down 1.4%, while the Dow Jones Industrial Average was also down. The Russell 2000 Index rose 0.4%.
While Donald Trump and Joe Biden discussed health care, foreign policy and the response to the pandemic in Thursday’s presidential debate, both spoke of the urgency to step up government aid to help Americans cope with the Covid-19 crisis. A common driver behind the increase in returns is the belief that afterwards, no matter who wins the election, fiscal incentives will kick in.
“The markets are starting to say that we will not only get momentum, but also big momentum,” said Scott Knapp, chief market strategist of the CUNA Mutual Group. “More momentum than we thought in the past will lead to a more robust recovery.”
Throughout the year, skeptics have pointed to near-record low bond yields to question the persistence of the stock rally that drove the S&P 500 to an all-time high. For the first time since June, benchmark 10-year government bond yields rose above 80 basis points. Of course, it’s too early to be clear – 10-year rates stalled on a technical line (their average over the last 200 days) and a similar surge stalled four months ago – but im At the moment, the path of industries within the exchange is changing.
“To a certain extent, interest rates are catching up with other markets,” said Jim Tierney, chief investment officer for concentrated growth in the US at AllianceBernstein. “The steps signal that the economy is decently healthy, and that was the big unknown – how long it would take the economy to heal.”
Bank stocks stood out as winners this week. The yield curve has helped an industry that borrows short term and lends long term. It has moved more steeply, which means that interest rates on longer-term bonds have risen faster than those on short-term bonds. The spread between 2- and 10-year Treasury yields was over 70 basis points on Thursday, the largest since early 2018.
For its best week since June, the KBW Bank Index rose 3.7% compared to the market. The SPDR S&P Regional Banking ETF (ticker KRE) rose by more than 6% for the third time in four weeks. With a gain of 19% in October, the fund is on the way to becoming the strongest month since November 2016.
On the other hand, the house builders were selling themselves. The SPDR S&P Homebuilders ETF (ticker XHB), which has more than doubled since the market bottomed in March, fell nearly 3% over the course of the week.
Tech stocks, the biggest winner of the year due to strong balance sheets and the industry’s ability to support work at home, were the worst performers on the S&P 500, down 2.2%.
The higher breakout in bank stocks alongside the surge in bond yields could give the S&P 500 a chance to thrive even without technical leadership, according to Bloomberg Intelligence strategists including Gina Martin Adams. Various technical indicators have been triggered in the past few days, “giving hope that there might be new leadership in the early stages of development,” the strategists wrote.
“You get the reflation trade people were talking about,” Darrell Cronk, chief investment officer for wealth and investment management at Wells Fargo, told Bloomberg Television. “It plays exactly on cue as it should.”
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