US Stock Market: Response to Rising Yields Lays Groundwork for Volatile Reaction to Friday’s Jobs Report

James Hyerczyk
·3 min read

The major U.S. stock indexes finished sharply lower on Wednesday with the rotation out of the high-flying technology stocks fueling the selling pressure. Although all of the indexes declined during the session, some investors moved money into sectors viewed as more likely to benefit from an economic recovery on the back of fiscal stimulus and vaccination programs.

In the cash market on Wednesday, the benchmark S&P 500 Index settled at 3819.72, down 50.57 or -1.31%. The blue chip Dow Jones Industrial Average finished at 31270.09, down 121.43 or -0.39% and the technology-driven NASDAQ Composite closed at 12997.75, down 361.04 or -2.70%.

Clashing Fundamentals Pressuring Growth Shares

Investors are receiving a dose of so-called positive news being perceived as negative news. Broadly speaking, we can all agree that the successful vaccination rollout and the steadily improving economy are positives, but at the same time, this news is driving up Treasury yields and expectations the Fed may opt to end its loose monetary policy sooner than expected. These conflicting factors are pressuring growth stocks, while driving investors into beat-up value plays.

The price action is essentially the opposite we saw nearly a year ago when the start of the pandemic and lockdowns drove up “stay at home” stocks while crushing the travel and leisure industry.

The thing is, everyone knew it was eventually going to happen, but the pace at which investors expect it to occur is shocking investors into selling aggressively. Generally speaking, everyone is getting rattled by the pace of the interest rate surge… all, except the Federal Reserve.

Someone Has to Be Right

Investors see the vaccine distribution as a positive for the economy and one reason why rates should be going up. The Federal Reserve also acknowledges that vaccinations are having a positive influence on yields. However, Fed policymakers aren’t willing to budge on policy because they are greatly worried about the weak performance in the labor market.

The U.S. economic recovery continued at a modest pace over the first weeks of this year, with businesses optimistic about the months to come and demand for housing “robust,” but only slow improvement in the job market, the Federal Reserve reported.

While vaccine distribution is expected to help the economy, data showed U.S. private employers hired fewer workers than expected in February according to ADP, suggesting the labor market was struggling to regain speed.

Meanwhile, another report showed U.S. services industry activity unexpectedly slowed in February amid winter storms, while a measure of prices paid by companies for inputs surged to the highest level in nearly 12-1/2 years.

The focus for traders now shifts to Friday’s U.S. Non-Farm Payrolls report, which could be a major market moving event.

Treasury Yield Watch

The U.S. 10-year Treasury yield ticked up to 1.47%, pressuring areas of the market with high valuations. It was still off last week’s peak of above 1.61% that roiled stock markets as investors bet on rising inflation.

The higher yields move the worse it may become for holders of high-growth tech companies because investors value them based on earnings expected years into the future, and high interest rates hurt the value of future earnings more than the value of earnings made in the short term.

Depending on how Friday’s jobs report turns out, yields could soar through 1.61% or come crashing toward 1.40%, meaning investors should start preparing for a volatile trading session.

For a look at all of today’s economic events, check out our economic calendar.

This article was originally posted on FX Empire

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