Traders work on the floor of the New York Stock Exchange.
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Equity investors have been focusing too much on interest rates, said SoFi’s head of investment strategy.
Rates “can be a poor indicator of equity market behavior,” Liz Young said in a blog post Thursday.
Tech stocks can outperform the S&P 500 even in the face of a rising 10-year yield, the online lender said.
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Stock investors have been engrossed this year by moves in the US 10-year Treasury yield, but they would be better off concentrating on broader factors such as economic growth, said the head of investment strategy at online loan services company SoFi.
“We’re obsessing too much. Rates matter, but they shouldn’t drive too much of your allocation decisions and they can be a poor indicator of equity market behavior,” said SoFi’s Liz Young in a blog post Thursday that zeroed in on the 10-year yield. The yield is tied to a range of lending programs including mortgages. Bond yields rise when prices fall.
The yield hovered around 1.23% on Thursday and Young expects it to move higher through the rest of 2021.
“Instead of focusing so much on rates,” she said, “I think we can be better served by focusing on economic growth, corporate fundamentals, and the state of the global consumer.”
Investors during the year have sold off pricey, large-cap tech stocks as the 10-year yield quickly ascended to 1.75% in March, reaching highs not seen since before the COVID-19 outbreak was declared a pandemic in early 2020.
SoFi examined the usage of the 10-year yield as an indicator of sector winners and losers and “surprisingly” found that technology beat the S&P 500 index by 8.7% when yields rose and beat it by 4.4% when yields fell. SoFi reached that conclusion after finding 16 periods when the 10-year yield moved meaningfully up or down – or a move of 1.3% to 1.5% – between November 2008, when quantitative easing by the Federal Reserve began, through today.
The small sample is size, but it was important to isolate the QE regime, said Young, referring to the central bank’s bond-buying program.
The question for financials was how well they perform in the face of yield changes, as that sector is widely known to benefit from higher rates. SoFi found that financials beat the S&P 500 by an average of 7.4% when yields rose.
Even with tech stocks sometimes bearing the brunt of higher yields, the S&P 500 information technology sector this year has climbed about 22%. The S&P 500 financial sector has soared about 28%, with each group contributing to pushing the US equity benchmark up by 20% and to record highs.
Young also noted that demand for 10-year Treasurys is strong and at “unprecedented levels” among foreign buyers and that domestic demand is plentiful from large institutions that need to manage liabilities and risk.
“That level of demand keeps a lid on yields, and a …read more
Source:: Business Insider