Rising Treasury yields are sending shivers down the stock market, particularly for high-yield tech-related stocks. But history shows that when returns rise “for the right reasons,” tech stocks and cyclically sensitive stocks tend to thrive, according to Raymond James.
“Since 1990, during rising rate environments, more cyclical sectors have performed better,” said Adam. “The annualized average outperformance relative to the S&P 500 and the percentage of time it outperforms the S&P 500 is greatest for the technology, consumer discretionary and industrial sectors, three of our preferred sectors,” while the sectors that generate the highest dividends such as utilities, real estate and consumer staples tend to underperform. Stocks performed mixed on Monday, with the Nasdaq-100 NDX, -2.39%, down 1.7%, and the Nasdaq Composite COMP, down -2.28%, down 1 , 5%, suffering the steepest falls. Both are leaning toward technology-oriented large-cap stocks. The Dow Jones Industrial Average DJIA, + 0.28% was marginally positive, while the S&P 500 SPX, -0.56% was down 0.5%. The increase in yields is largely attributed to expectations of a possible rise in inflation thanks to increased public spending and ultra-lexical monetary policy. Fears that the Federal Reserve may begin to withdraw some liquidity earlier than expected would help to disrupt stocks, analysts said. But Adam argued that not only is inflation unlikely to “short-circuit” the rally, but it can be a positive development for stock bulls. “When looking at how the S&P 500 performed under different levels of core inflation, stocks performed above average in an environment where core inflation was between 1-4%,” he wrote. Inflation at those levels is generally considered healthy when it coincides with the improvement in economic activity, Adam said. The reason is that companies have pricing power, allowing them to raise prices, while also reaping the benefits of productivity gains, helping to drive earnings growth. Raymond James expects core inflation to be around 2%. Adam said that when core inflation hovers between 1% and 3%, the average performance relative to the S&P 500 year-over-year has been stronger for technology (+ 6.8%), healthcare (+ 2 , 3%) and the consumer. discretionary sectors (+ 2%).