Tech Stocks Power Market to Record on All-Clear From Treasuries
(Bloomberg) -- For months, the threat of inflation grounded the tech stocks that drove the post-pandemic rebound. And yet, when data this week showed the threat is real, the Faangs took off.
Investors in the tech megacaps can thank the bond market, where an epic change in sentiment sent 10-year yields tumbling the most in a year even after data showed inflation accelerated at the fastest rate since 2008 -- normally a recipe for a spike in rates and trouble for stocks with high valuations. Instead, the Nasdaq 100 jumped 1.7% over the five days for a fourth straight weekly gain. The yield drop took the shine off value stocks, with banks slumping 2.4% in the week.
The signal from the bond market -- that inflation isn’t a threat because the Federal Reserve is hellbent on keeping rates near zero -- sets up a “great recipe for risk assets,” according to BNY Mellon Investment Management’s chief strategist Alicia Levine.
“The Fed has convinced everybody that they’re going to roll with it,” Levine told Bloomberg TV and Radio on Friday. “A mild inflationary environment is actually great for equities, it’s great for businesses, it’s great for wages and you don’t have a Fed that’s going to come and kill it all. So you’ve got cyclicals going and you’ll have tech going here.”
The Nasdaq 100 had languished as rising inflation was perceived as making tech shares’ already-stretched valuations impossible to justify. While investors rotated into value stocks for a while, the market’s loss of its heavyweight leader kept indexes in a rut since March.
The dam broke Thursday after the consumer-price reading came and went without market histrionics. The S&P 500 rallied to its first all-time high since early May and the Faang block climbed 0.6% in the week. The Russell 1000 Growth Index outperformed its value counterpart by 2.4 percentage points.
Amazon.com Inc. jumped more than 4%, Twitter Inc. rallied 2.5% and Alphabet climbed 1.5% in the week. Meme stocks that captured much of the period’s headlines faltered along with Bitcoin.
Investors took solace from the nature of the rise in inflation even though it exceeded estimates, a third of the surge came from a jump in used vehicle prices, with airfare and hotels also rising -- categories in stark demand as the economy reopens. Those price pressures are the type the Fed has been warning won’t be permanent.
And the central bank’s calculus is unlikely to change at next week’s meeting, meaning risk assets may continue their rebound. Policy makers are widely expected to stick to their ultra-easy monetary and downplay any risks from inflation. The bond market reflects as much, with traders closing out bearish positions en masse while trimming bets on Fed hikes.
“The continuation of quantitative easing, the continuation of low rates is providing support to market multiples and perhaps to earnings,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management. “That’s supportive for stocks.”
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