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Rising Yield May Sink Technology Stocks, Boost Banks

By Michael KramerStock MarketsNov 13, 2020 05:48AM ET
www.investing.com/analysis/rising-yield-may-sink-technology-stocks-boost-banks-200544537
Rising Yield May Sink Technology Stocks, Boost Banks
By Michael Kramer   |  Nov 13, 2020 05:48AM ET
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This article was written exclusively for Investing.com

With the promising news on Monday about Pfizer's (NYSE:PFE) new COVID-19 vaccine, a vicious rotation ensued. Investors began dumping all those technology names that have benefited from the stay-at-home trade, while traditional bricks-and-mortar stocks have struggled. News of the vaccine may signal a change in the market trend as investors begin to look to the future. 

Since the market is a forward-looking discounting mechanism, it is essential to think about the world in 6 to 9 months, especially if the vaccine is truly around the corner. Even more so if it proves to be as efficacious as Pfizer's data showed. An improving economy could help to send yields on the long end of the curve higher. It could even send the banks and other cyclical sectors up as money begins to rotate away from some of the technology stocks that have soared. 

Treasury Yield Spread
Treasury Yield Spread

Higher Yields, Wider Spreads

While it may merely be a short-term trend or the start of something bigger, yields on the 10-year Treasury have begun to rise. Currently, trading around 90 basis points, up from around 50 basis points mid-summer, a considerable jump. While still low relative to rates a year ago, the spread on the 10-year and two-year Treasuries have grown to their widest since early 2018.

Those wider spreads could help drive some of the traditional banks higher, especially if those widening spreads predict an improving outlook for the overall economy. This could trigger a rotation into these financial stocks such as JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC), and Citigroup (NYSE:C). It could also help drive some of the credit card stocks to perform better, such as Capital One (NYSE:COF) or American Express (NYSE:AXP). 

KBW Daily
KBW Daily

This shift and change in the bond market and its spread could signal that better economic growth may return, indicating the end of the stay at home trade. If the bond market perceives a return to growth, investors may choose to sell some of those technology stocks we have grown so fond of. 

Buy-The-Dip Crowd

What may be more worrisome is that the "buy the dip" crowd may find out that a pullback is not a dip but the start of a new trend lower. Should there be an actual rotation trade that occurs, investors may find that the money leaving some of the high-flying, stay-at-home names doesn't return but instead stays invested in the re-opening stocks. 

Of course, we have seen this show before. With the market flip-flopping, jumping heavily into the re-opening stocks, and then rushing back into the technology sector several times over the last few months. The question is, will this time will be different?

It may turn out that this time it is—with the prospects for a vaccine and improving therapeutics. So in the next 6 to 9 months there may finally be an economic recovery, leading to higher yields. While this would help to lift some of the financial stocks and cyclical names, it would also likely mark the end of the overvalued technology sectors run higher. 

Rising Yield May Sink Technology Stocks, Boost Banks
 

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Rising Yield May Sink Technology Stocks, Boost Banks

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Comments (9)
Cornel Pod
Cornel Pod Nov 14, 2020 9:53AM ET
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Thx Mike for a great article. The 10/2 spread not only is improving but has formed a bull triangle which broke out recently. Hopefully this will provide a backbone for the market in the face of a megaphone on the spy. It can't be only tech generals wo xlf and iwm
Ramana Murthy
Ramana Murthy Nov 13, 2020 4:23PM ET
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You will be proven wrong Mike. People behaviour changed. Tech is now bringing like never leveraged before. Tech will go higher and higher.
jonathan seagull
jonathan seagull Nov 13, 2020 4:23PM ET
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Any slightest conviction, noatter how good it is, is the start of big failure. Keep open and wide mindset.
Jermaine .A
Jermaine .A Nov 13, 2020 1:36PM ET
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The idea that rising interest rates will benefit banks is asinine. All the companies and people that will default on their loans from higher rates is too large. The banks balance sheets will dissipate
Cornel Pod
Cornel Pod Nov 13, 2020 1:36PM ET
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Mike knows what he is talking it's ALL about spreads for financials AND in turn stocks
Nick Ban
Nick Ban Nov 13, 2020 12:45PM ET
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Not downplaying rotation but even given forward thinking too many unknowns of vaccine. Still betting on tech as well as banks over the course of next year given how beat down most of that particular sector is.
Nick Ban
Nick Ban Nov 13, 2020 12:38PM ET
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This year is not a trend. Nasdaq had outperformed all other major American jndexes over the past decade and will continue to do so given the rapid innovations in todays ever changing world.
Omar Olivares Matos
Omar Olivares Matos Nov 13, 2020 12:35PM ET
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Covid19 cases spiking all over the world, and with record highs in yhe USA..... good luck! Tech stocks will be on stage for at least one more year!
Idel Raskansky
Idel Raskansky Nov 13, 2020 12:33PM ET
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You have been wrong before....
Simone Dozza
Simone Dozza Nov 13, 2020 9:01AM ET
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Covid speed up shift to tech for the entire world. Only something will get back
Zach Earle
Zach Earle Nov 13, 2020 6:47AM ET
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Alternatively, covid may be the figurative end of days; you never know.
 
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