Mutual Swoons Bind Stocks and Bonds in Replay of Past Hawk Raids
(Bloomberg) -- It was deja vu for stock and bond traders Friday as they relived past bouts of central bank-fomented neurosis.
Both markets plunged in unison, a rare but not unheard of spectacle that is almost always triggered by Federal Reserve hawkishness. The S&P 500 Index tumbled 2.5 percent in its biggest drop since the Brexit vote while Treasuries slumped, sending the yield on the 10-year note to the highest since June.
A simple comparison that adds up percentage losses in the SPDR S&P 500 ETF and iShares 20+ Year Treasury Bond ETF shows that the last time something like this happened was Dec. 3, 2015, when Fed Chair Janet Yellen indicated the conditions had been met for higher rates. The two ETFs haven’t seen declines this big on the same day since June 20, 2013, the start of the so-called taper tantrum, when Ben S. Bernanke said the Fed was about to reduce bond purchases aimed at stimulating the economy.
“Lots of skittishness and the hawkish noise comes as people begin to doubt the efficacy of monetary policy,” said Michael Block, chief strategist at Rhino Trading Partners LLC in New York. “The stock selloff is happening in conjunction with a global bond pullback and that is confounding allocators who thought they were hedged.”
It’s not like bears in both markets haven’t been warning of valuation-related dangers for months. The S&P 500 started the day with a price-earnings ratio above 20, one of the highest since the Internet bubble. Using a yield comparison sometimes known as the Fed model, government debt is even more inflated, trading earlier this year at the highest premium to stocks since 2013.
Today reinforced a 2016 trend in which disparate assets post unified moves. The increased correlation shows up in a Credit Suisse Group AG gauge tracking price relationships in equities, credit, currencies and commodities, which sits at the highest since at least 2008.
The rout started Thursday when European Central Bank President Mario Draghi downplayed the need for more measures to boost growth. Declines accelerated on Friday as Boston Fed President Eric Rosengren warned against waiting too long to raise interest rates.
Utility and phone companies, shares with the highest dividend payout among 10 industries in the S&P 500, bore the brunt of Friday’s selling as higher yields reduced the allure of equity income. Indexes tracking the groups tumbled more than 3.4 percent for the biggest retreat since at least February 2015. The duo were the darlings in the first half, with returns exceeding 20 percent, as speculation over a delayed rate increase from the Fed sent Treasury yields to record lows.
“Boring utilities and other defense trades started behaving like Apple in the glory days or hot biotech stocks and it attracted momentum players,” Michael Purves, chief global strategist at Weeden & Co. in Greenwich, Connecticut, said by phone. “What we’re having is an unwind of the 10-year that’s been so key to that support.”
Real-estate investment trusts, a group also favored by investors for their steady income, were another victim of higher rates, as the S&P 500 Real Estate Index plunged 3.9 percent for the biggest retreat since August 2015.
The rush to the exits made volume surge. According to data compiled by Bloomberg, trading in phone shares was 72 percent higher than the 30-day average. The biggest REIT funds, Vanguard REIT ETF and the iShares U.S. Real Estate ETF saw their volume more than double from Thursday.