Wall Street Week Ahead: Declining Treasury rates give stock investors the all-clear

 Wall Street Week Ahead: Declining Treasury rates give stock investors the all-clear

The benchmark 10-year US Treasury yield is now down around 35 basis points from its October 16-year highs. Bond prices and yields are negatively correlated.

According to LSEG statistics, almost 81 percent of the 403 businesses in the benchmark index that have declared results so far have surpassed projections. Analysts anticipate earnings growth of 5.7 percent for S&P 500 companies in the third quarter.

After months of selling, some investors are being enticed back into the US stock market with the hope that the recent decline in Treasuries has peaked.

Bonds and stocks have had a volatile connection in recent months, with equities declining as Treasury rates increased to levels not seen in sixteen years. Increased yields make equities more competitive as investments, but they also increase the cost of capital for individuals and businesses.

However, that dynamic has flipped for the majority of the last week due to reports of US government borrowing that was lower than anticipated and indications that the Federal Reserve is drawing closer to the conclusion of its rate-hiking cycle.

The benchmark 10-year US Treasury yield is now down around 35 basis points from its October 16-year highs. Bond prices and yields are negatively correlated. The S&P 500, meanwhile, had its largest rise since November 2022 last week as it soared 5.9 percent. The index is up around 14% so far this year, although it is down about 5% from its July high.

"Other asset classes are finding their footing thanks to the stability in rates," said Jason Draho, UBS Global Wealth Management has announced that head of asset allocation for the Americas. "If equities move higher that you may find investors starting to feel as if that they need to chase performance throughout the end of the year."

Until investors make up their minds on whether the economy will escape going into recession, Draho anticipates that the S&P 500 will fluctuate between 4,200 and 4,600. Recently, the index was about 4,365.

There might be other variables favoring stocks. According to an indicator developed by the National Association of Active Investment Managers, exposure to stocks among active money managers is almost at its lowest point since October 2022. This is a strong indication for contrarian investors who want to purchase when pessimism grows.

According to a report released by the company's strategists on Friday, aggregate equity positioning monitored by Deutsche Bank dropped to a five-month low earlier in the week, which contributed to a strong rebound as investors flocked back into the market.

Meanwhile, data from CFRA Research shows that the last two months of the year have often been a solid stretch for equities, with the S&P 500 increasing by an average of 3%. According to statistics from Carson Investment Research, the index's strongest two weeks of the year began on October 22 and had seen increases of an average of 2.2 percent.

Ryan Detrick, chief market planner at Carson Investment Research, believes that the current rally in stocks will push them past their June high. "We had an extremely oversold market at the time in the midst of an improving economy, and the Fed coming out a little more dovish which provided the kindling we necessary for a rally," Detrick said.

The U.S. employment statistics released on Friday provided more support to the bullish feeling. It indicated a minor rise in the unemployment rate and the weakest pay growth in two and a half years, indicating that the job market is cooling and supporting the Fed's decision to hold off on raising interest rates. The S&P 500 had a day-end gain of 0.9 percent.

Of fact, a lot of investors are still reluctant to buy equities at this time. Apple Inc., a global leader in technology, was the most recent large technology and growth company to provide a dismal forecast on November 2. Wall Street was not as optimistic about the iPhone maker's Christmas sales projection as they were. Based on LSEG data, at least 14 analysts lowered their price targets for the company.

Nevertheless, according to LSEG statistics, over 81% of the 403 businesses in the benchmark index that have reported results so far have above projections, and analysts anticipate earnings growth of 5.7% for S&P 500 companies in the third quarter.

However, the majority of the year has seen deeper selloffs after rallies in the US government bond market, making it unprofitable to wager on reversals in Treasuries. Since the year's low, the yield on the 10-year Treasury note has increased by almost 125 basis points.

A concern among many investors is that the employment statistics from November 3rd, which hinted to a "Goldilocks economy," would not last. Although indications of slower-than-expected growth are now supporting equities and bonds, according to Greg Wilensky, head of U.S. fixed income at Janus Henderson Investors, they might ultimately raise concerns about a recession.

"Eventually 'good' stabilization may turn into a debate of whether the economy as well as labor markets are slipping away too much," he said.