Wall Street Week Ahead: Stock investors see green light in falling Treasury yields

NEW YORK: Hopes that a rout in Treasuries has run its course are tempting some investors back into the US stock market after a months-long selloff.

The relationship between stocks and bonds has been a tight one in recent months, with equities falling as Treasury yields climbed to 16-year highs. Higher yields offer investment competition to stocks while also raising the cost of capital for companies and households.

Over much of the last week, however, that dynamic has reversed, following news of smaller than expected US government borrowing and signs that the Federal Reserve is nearing the end of its rate hiking cycle.

Yields on the benchmark 10-year US Treasury, which move inversely to bond prices, are down about 35 basis points from 16-year highs hit in October. Meanwhile, the S&P 500 surged 5.9% in the past week, its biggest gain since November 2022. The index is off around 5% from its July peak, though up nearly 14% year-to-date.

“The stability in rates is helping other asset classes find a footing,” said Jason Draho, head of asset allocation Americas at UBS Global Wealth Management. “If equities move higher you may find investors starting to feel as if they need to chase performance through the end of the year.” Draho expects the S&P 500 to trade between 4,200 and 4,600 until investors determine whether the economy will be able to avoid a recession. The index was recently around 4,365.

Other factors may also be working in stocks’ favor. Exposure to equities among active money managers stands near its lowest level since October 2022, according to an index compiled by the National Association of Active Investment Managers - a compelling sign for contrarian investors who seek to buy when pessimism rises.

Aggregate equity positioning tracked by Deutsche Bank fell to a five-month low earlier in the week, the firm’s strategists said in a Friday note, helping fuel a powerful bounce when investors rushed back into the market.

At the same time, the last two months of the year have tended to be a strong stretch for stocks, with the S&P 500 rising an average of 3%, according to data from CFRA Research. The best two weeks of the year for the index, during which it has risen an average of 2.2% - kicked off on Oct. 22, according to data from Carson Investment Research.

“We had an extremely oversold market in the midst of a strong economy, and the Fed coming out a little more dovish was the kindling we needed for a rally,” said Ryan Detrick, chief market strategist at Carson Investment Research, who believes the current rebound in stocks will take them past their July high.

Bullish sentiment received another boost on Friday from US employment data, which showed a slight gain in the unemployment rate and smallest wage increase in 2-1/2 years, suggesting that the labor market is cooling, bolstering the case for the Fed to stay its hand. The S&P 500 closed up 0.9% on the day.

Of course, plenty of investors remain hesitant to return to stocks just yet. Technology bellwether Apple Inc on Thursday was the latest of the market’s massive technology and growth stocks to offer an underwhelming outlook. The iPhone maker gave a holiday sales forecast that was below Wall Street estimates.