Now that President Biden’s $1.9 trillion COVID-19 relief package is done, traders are eyeing what's next including a recovery package that could address infrastructure, climate change, inequality or other promises that Biden made on the campaign trail.
The Nasdaq Composite has fallen 7.25% from its Feb. 12 record high through Tuesday as a sharp rise in the 10-year year yield caused investors to flee stocks in the growth-heavy index. At the same time, the Dow Jones Industrial Average has held within 0.4% of its record peak.
Investors have taken advantage of the selloff in technology, buying shares of highflyers such as Tesla Inc. and Apple Inc. at heavily discounted prices. But David Rosenberg, chief economist and strategist at Toronto-based Rosenberg Research warns the current environment is a lot like what happened at the peak of the dot-com bubble.
In early 2000, the view, like today, “was that equities were not interest-rate sensitive any longer and that the business cycle had been repealed,” said David Rosenberg, chief economist and strategist at Toronto-based Rosenberg Research.
Between mid-March and mid-April of that year, the Nasdaq Composite declined 20% while the Dow remained near its all-time highs. By the end of 2000, the Nasdaq had been cut in half while the Dow declined more than 9%.
Before the recession began in March 2001, the Nasdaq was down 66% and the Dow had lost 15%.
“The lesson here is that near or at market peaks, it is common for the Nasdaq to first succumb to the overhyped inflation fears and the rise in bond yields, and after the mega caps slip, the Dow follows with a lag,” Rosenberg said. “And the blue-chips decline, albeit at a slower rate.”
The 10-year Treasury yield has climbed to a 13-month high amid concerns the unprecedented amount of fiscal and monetary stimulus used to combat the economic slowdown caused by COVID-19 will bring back inflation that has been lacking since the 2008 financial crisis.
History indicates there is “still no 10Y yield top and a bearish bias remains,” wrote Paul Ciana, technical strategist at Bank of America.
The last two major bond-market selloffs, in 2016 and 2012, resulted in the 10-year yield rising by 132 basis points and 162 bps, respectively. Measuring from the August 2020 low of 0.515% suggests the top in yield could occur in the 1.82% to 2.13% area and begin forming in May, according to Bank of America’s analysis. In both examples, the top took about three months to form.
Deutsche Bank strategists say a “top-down approach” points to the 10-year reaching 2% to 2.25%, however they say that level will be reached at the end of this year.
The firm says that in the end, it will be the Federal Reserve that will determine if the U.S. economy exits its low inflation regime.
“Given the current Biden fiscal plans, the market is likely to price more than 50% probability this side of the 2022 midterm election,” wrote Deutsche Bank strategists led by Francis Yared.