This latest surge in rates may have very well pierced the tech bubble in the purest of momo names, but if rates can find a way to stabilize and retreat from here, we could see a stabilization and resurgence in tech names...at least for a while. During the depths on the recent pullback we didn't see the typical run for the exists type sentiment that we normally see except for the NAAIM indicator and a couple of other shorter term indicators. Fund flows and AAII sentiment didn't budge and is still showing elevated bullish behavior. Also look at how muted the VIX spike relative to other recent pullbacks. Thanks to the resurgence in value names the SPX and especially the DOW have recovered from the pullback while the NASDAQ is still well off the highs. We are seeing crazy day to day rotation in and out of growth and value names.
So, the narrative as to why growth has been getting hit is because rising rates have a negative impact on the valuation of secular cash flow generators given the higher discount rate applied to cashflows. At the same time rising rates have steepened the yield curve which supposedly makes financials more attractive and so you get this massive rotation from growth to value happening. Growth over value has dominated for years and really accelerated during COVID but for the past 5-6 months this trend has reversed sharply. So, is this the beginning of the long awaited value over growth cycle turn? For that to happen I believe you would need to see earnings disappointments or some other negative shock to the tech bellwethers i.e. the FAANGS. This is what kick started the last major value cycle from 2000-2007. If earnings from the tech giants and growth plays in general don't come under threat then this value upturn will probably end up being a short lived affair.
In the short term the value rotation looks overbought here. All the Fed has to do is just hint that they are ready to step in to cap the yield in long bonds and this trade would reverse hard in the short term. At some point the Fed has to step in. If yields keep climbing it will undermine the massive $1.9T stimulus bill. Remember, it wasn't too long ago that the Fed was urging politicians to play their part in supporting the economy by passing a major stimulus bill. Well, they did just that and so now the ball is back in the Fed's court. Given the passing of this stimulus and Fed's accommodative stance towards the economy, It would be asinine if the Fed just sits on their hands and continues to just watch this surge in long bond yields. Mortgage rates are already ticking higher. What's the Fed's uncle point? Is it 1.75%, is it 2% on the 10 year? The Fed meeting this week will be a big one. If they don't hint strongly towards doing some sort of yield curve control we will probably see yields on the 10 year make a run for 2%. That's going to cause more pain for the market, tech in particular. And then what....the Fed is going to capitulate a few days later and announce something? They need to say something at this meeting or they will risk looking like fools like they did in late 2018 when they stubbornly took too long to respond to changing market conditions. Maybe Powel learned something from this. Maybe he didn't. The last time Powel spoke he didn't suggest any changes to Fed policy and the market sold off and yields took off notably. All he said was the rising yields had "caught his eye". It appears that most market players are expecting more disappointment from Powel again, but given how bond yields keep making fresh highs I think there's a much better chance this time for a positive outcome.
Back in late 2018 the bond market bullied the Fed into doing a complete 180 turn from their rate hike campaign. The tail wagged the dog. They are now bullying the Fed again. The Fed has to realize that they are the dog. If the Fed wanted to, they could rip out the throats of the bond bears for they have literally unlimited buying power. Right now there's a lot of speculative trend following shorts in the bonds. It's ripe for a squeeze and the Fed probably won't even need to do a lot of heavy lifting. Just them announcing that they will backstop bonds would send yields sharply lower on their own. If the Fed does this you're going to hear it from the permabears and self righteous market purists as they cry foul about such manipulation. But guess what? Manipulation is here to stay. The Fed stepped in to backstop corporate bonds last year and it worked. You're never going to have markets be totally free, nor would that even be desirable. If markets were totally free, manipulation would be worse. Those with the largest pools of capital would be in position of power and would manipulate markets with no mercy in order satisfy their self interests at the expense of everyone else. Due to the madness of crowds psychology, unfettered free markets would likely result in more frequent bigger boom and bust cycles as well. The truth is, you need regulations and you need central authorities to keep "the children" in check. It's arguable as to how to organize and run such overseers and no doubt they have been less than perfect and have abused their powers at times, but we need them to prevent the larger abuses and instability of purely free markets. Anyhow, I digress.
It will be interesting to see how things play out here. If the Fed says the right things this week and the markets end up making new highs with NASDAQ making a comeback to take back leadership, it will probably result in one last hurrah before something else eventually comes along to make the market stumble. The reason I say this is because sentiment conditions are already bullishly elevated for the most part and therefore not providing a wall of worry backdrop at the moment aside from a couple of shorter term indicators. It wouldn't be long before we see bullish sentiment turn to euphoric bullish and bad things tend to happen when we get that.
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