Everything Rally Reignites After Bonds Brush Off ‘Awesome’ Data

Not even a week’s worth of evidence that the U.S. economy is roaring back from the pandemic has been able to derail the concerted rally sweeping stocks and bonds.

The S&P 500 Index gained alongside 30-year Treasury bonds for a fourth straight week, the longest in-tandem rally since August 2008, according to data compiled by Bloomberg. The Nasdaq 100 Index also rose for a fourth week, two months after a spike in rates sent high-valuation tech shares spiraling as investors priced in an economic boom.

It was anything but guaranteed that blowout data would juice demand for both assets, particularly after the March selloff that sent rates to multiyear highs. Instead, when retail sales and jobless claims shattered forecasts, benchmark 10-year Treasuries rallied the most since August. Breakeven inflation rates barely budged, clearing the way for investors to rediscover their affinity for megacap tech stocks.

Everything Rally Reignites After Bonds Brush Off ‘Awesome’ Data

That Treasuries took the data in stride suggests investors may be pricing in a more “normalized” growth environment ahead, according to John Hancock Investment Management’s Emily Roland. That’s different from prior expectations for a supercharged economic boom that some feared would spark runaway inflation that would dent demand for long-term bonds and threaten corporate profits.

“It’s almost as if it just can’t get any better than this, because at the same time you have inflationary pressures that are remaining contained,” Roland, the firm’s co-chief investment strategist, said on Bloomberg Television. “Awesome economic data, inflationary pressures remain contained, and you’re seeing this nice favorable reaction from the stock market.”

The S&P 500 rose 1.4% in the five days to end at a record. The Dow Jones Industrial Average added 1.2% and the Nasdaq 100 gained 1.4%. Both closed at all-time highs. Ten-year Treasury yields hovered near 1.6%, 17 basis points below the late-March peak.

The revival in megacap tech shares has come at the expense of one of 2021’s highest conviction trades: the rotation into industries that will benefit most from the economic revival. A flurry of vaccine breakthroughs in early November sent billions flowing into financials and industrials -- some of the heaviest weightings in value benchmarks.

However, after markets mobilized to rapidly reprice the growth environment, that momentum is faltering. While the Russell 1000 Value Index is still outperforming the Nasdaq 100 by 5.9% year-to-date, the tech benchmark is leading by 3.2% over the past month.

Everything Rally Reignites After Bonds Brush Off ‘Awesome’ Data

It’s the same story on a sector level. Year-to-date, energy and financials are well ahead of the pack with gains of 28% and 20%, respectively. Those same groups are bringing up the rear over the past month, while tech jockeys with utilities and makers of non-essential consumer goods for the top spot.

Whether cyclical shares are at an inflection point or simply hitting an air pocket remains to be seen. In the eyes of National Securities Corp.’s Arthur Hogan, the shifting stock leadership has more to do with the rotation trade getting stretched than it has to do with any fundamental economic news.

“We’re seeing a rotation back into old-school technology stocks that have earnings and out of some of those economically sensitive areas,” said Hogan, chief market strategist at National Securities Corp. “We had a very extended rotation from out typical growth, call it, and into more economically sensitive cyclical, and with that getting extended, I certainly think that’s causing a bit of rotation into things that had been ignored for a bit.”

©2021 Bloomberg L.P.

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