Record highs were hit again this week as both the Dow Jones Industrial Average (see chart here) and the S&P 500 (see chart here) continue to plow ahead. However, not the same can be said for the Nasdaq Composite (see chart here) and the small-cap Russell 2000 (see chart here). Both of these indexes have lagged behind the Dow and S&P torrid pace.
As with technology and small-cap stocks, when interest rates begin to move up these sectors begin to take notice. The 10-year treasury yield is one of the go to benchmarks that professional money managers key in on. This week the 10-year yield touched a one year high of 1.77% (see chart here). It’s easy to look at that yield and think that this yield is not that high at all. However, when you realize that just last summer the yield on these bills were at 1/2 of 1 percent, the move up to 1.77% does stand out. This sharp move from off the lows of 2020 is what has caught the eye of professional money managers that value high growth companies. It is clear that a full rotation out of high multiple stocks has not occurred yet, but higher interest rates and the threat of the continuation of higher interest rates seem to be the reason why the Nasdaq Composite (see chart below) and the small-cap Russell 2000 (see chart here) have lagged.
Now that the first quarter of 2021 has ended, Q1 earnings reporting season is on the horizon. I am not sure what to expect out of corporate America pertaining to top or bottom line growth. We find ourselves at what appears to be the start of coming out of the pandemic with some degree of normalcy. I would not be surprised if corporate America is bullish on their quarterly conference calls and speak directly to the early results of the vaccine deployment and the change that they are seeing in their customers behavior and spirits.
Good luck to all -)
~George
