Tech stocks refuse to listen to the bond market

This is The Takeaway from today’s Morning Brief, as you can sign up to receive in your inbox every morning along with:

The U.S. 10-year Treasury yield ( ^TNX ) jumped 9 basis points on Wednesday to settle at 3.945% — its highest level since just before the ATM panic in March.

This essentially confirms the message from the Federal Reserve today in its minutes from the June FOMC meeting – that “almost all” Fed members expect more rate hikes this year despite the pause last month.

“Higher for longer”[ads1]; is indeed the 2023 mantra on Wall Street — just don’t tell that to stocks, which are pricing in the softest of landings.

Tech stocks refuse to listen to the bond market

US 10-year Treasury yields rise through trendline resistance in a significant technical breakout from a multi-month downtrend

Meanwhile, the tech sector took a small hit in line with historical correlations (as tech stocks tend to prefer Lower prices). However, some AI-hyped names like Microsoft ( MSFT ) were spared the red, while Alphabet ( GOOGL , GOOG ) managed an impressive 1.7% return. (Nvidia closed, but the loss was limited to a paltry 23 basis points.)

Bubble economics seems to trump real factors when it comes to stocks. And the technicals suggest that the bullish moves are not over.

morning short picture

morning short picture

In fact, tech stocks this year have largely ignored persistently high long-term interest rates, disconnecting from last year’s tight correlation when the direction was down.

iShares Semiconductor ETF (SOXX), iShares 20+ Year Treasury Bond ETF (TLT)

Chip shares will be decoupled from bonds in 2023

Even an ATM panic couldn’t derail the growth names that have benefited from AI press. Arguably, the Fed’s injection of liquidity to prop up the banking sector is now helping to fuel the broad-based bullishness, which is no longer confined to a few megacap and AI-themed stocks.

Looking at the real economy, the differences persist. It’s no secret that manufacturing is in a global decline, but consumers around the world are powering the economy by spending on services.

This helps to explain why the S&P 500 is up 16% this year, while the industrial metal copper is down 13% from its peak in January. Sectors matter; Copper cares a lot more about another Tesla factory than mom and dad taking a cruise around the Caribbean.

Time tends to correct most imbalances and irrationalities in markets, but Lord Keynes taught us (perhaps) that markets can remain irrational far longer than most investors can remain solvent.

Eventually, the manufacturing and service sectors will converge again. The problem is that we don’t yet know when – or even the direction.

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