{"id":89837,"date":"2024-02-19T07:25:50","date_gmt":"2024-02-19T12:25:50","guid":{"rendered":"https:\/\/ifintechworld.com\/?p=89837"},"modified":"2024-02-19T07:25:52","modified_gmt":"2024-02-19T12:25:52","slug":"where-are-stocks-headed-the-indicator-to-watch","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=89837","title":{"rendered":"Where Are Stocks Headed? The Indicator to Watch."},"content":{"rendered":"<div id=\"js-article__body\" itemprop=\"articleBody\" data-sbid=\"WP-BAR-0000854562\">\n<div data-layout=\"wrap\n              \" data-layout-mobile=\"\" class=\"\n        media-object\n        type-InsetMediaIllustration\n          wrap\n  article__inset\n        article__inset--type-InsetMediaIllustration\n          article__inset--wrap\n    article__inset--lead\n  \"><\/p>\n<p>        <!-- eventually when we know what this card will be we can change it and leave this one --><\/p>\n<figure class=\"\n        media-object-image\n        enlarge-image\n        img-wrap\n        article__inset__image\n      \" itemscope=\"\" itemtype=\"http:\/\/schema.org\/ImageObject\"><\/p>\n<div style=\"padding-bottom:66.66666666666666%;\" data-subtype=\"photo\" class=\"image-container  responsive-media article__inset__image__image\"><\/div>\n<\/figure><\/div>\n<p>Crystal balls that can truly portend the future are scarce, but that doesn\u2019t mean investors are out of luck when it comes to predicting the market\u2019s trajectory.<\/p>\n<p>Treasury yields were a hot topic of conversation in 2023, as many strategists worried that the rising payout on the on the benchmark 10-year Treasury note would act as a headwind to stocks. After all, while investors can\u2019t beat stocks\u2019 long-term appreciation outlook, it\u2019s hard to turn down a basically risk-free 5% return when buying government debt.<\/p>\n<div class=\"paywall\">\n<p>Still, investors ignore yields on two-year Treasuries at their own peril, as these often signal where stocks are going.<\/p>\n<p>If the past few years have proven anything, it\u2019s that we live in unusual times, the market included. Stocks had a great 2023 overall, capped by the big year-end rally, even as bonds also got a boost in the so-called \u201ceverything rally.\u201d That defied skeptics who (rightly) pointed to how such a scenario is relatively uncommon, given fears that higher interest rates\u2014which push up yields\u2014tend to have a chilling effect on equities. Yet confidence in a soft landing for the economy ruled the day.<\/p>\n<p>So it may not be surprising to hear that stocks are still behaving in unexpected ways, breaking with precedent\u2014year to date, both the<br \/>\n        S&amp;P 500<br \/>\n       and yields on the two-year T-note are both up, even though stocks nearly always fall when two-year yields are rising.<\/p>\n<p>However, DataTrek Research co-founder Nicholas Colas notes that there are several reasons for the current situation, including the fact that two-year yields have really only increased slightly since the end of 2023. However, per usual, the Federal Reserve\u2019s actions are largely behind the move: The Federal Open Market Committee\u2019s December report called for three interest-rate cuts this year, and only a tiny minority of investors think the Fed will keep rates steady or raise them. Therefore yields can only go so high when interest rates are widely expected to fall.<\/p>\n<p>Nonetheless, Colas argues that despite these near-term factors, the \u201ccrystal clear\u201d relationship between two-year Treasuries and stocks will reassert itself.<\/p>\n<p>Because two-year yields are a proxy for the market\u2019s expectations about interest-rate directions, higher yields tend to spook stock investors because they demonstrate the belief that money will remain tight\u2014restraining economic growth, and potentially triggering a recession. Indeed this pattern was in play as recently as 2023\u2019s summer selloff, as two-year yields broke through the psychologically important 5% level. The fact that today\u2019s yield is 4.32% allows stocks more breathing room.<\/p>\n<p>Therefore, the connection isn\u2019t broken, and Colas sees two main reasons to keep a close eye on the two-year note.<\/p>\n<p>\u201cFirst, there is still some uncertainty about when the Fed will start the rate-cutting cycle. Everything else equal, earlier is better for stock prices because lower two-year rates would signal that the FOMC is ready to begin an easing cycle. Second, two-years capture not just 2024 policy expectations, but 2025 as well. Stocks look forward, and lower short-term yields would signify that we can anticipate a multiyear easing cycle rather than a few reductions this year and then stasis.\u201d<\/p>\n<p>Ultimately investors who want to know which direction the market will take this year have a powerful tool in the two-year note. For his part, Colas thinks we\u2019ll see another year of above-average gains for the S&amp;P 500, helped by a strong outlook for big tech, but \u201clower two-year rates would increase our confidence in that prediction.\u201d<\/p>\n<p>Of course, investors are also familiar with the two-year T-note for another reason, namely it\u2019s the front end of the U.S. Treasury yield curve. Yield-curve inversion\u2014when longer-term bonds yield less than short-term debt when they should pay more, and may portend an economic downturn\u2014is a classic recessionary signal.<\/p>\n<p>Inversion isn\u2019t infallible\u2014a warning in 2023 didn\u2019t pan out\u2014but seeing it narrow is still likely welcome to investors.<\/p>\n<p>That\u2019s exactly what\u2019s happening now, according to Tradeweb data from late Wednesday: Its data show the two-year\/three-year yield spread stood at negative 19.3 basis points, or 3.7 basis points narrower than Tuesday\u2019s close, and 5.7 basis points narrower than 2023\u2019s final close.<\/p>\n<p>So although the spread has been consistently inverted since mid-October, at \u201cits current value, the spread is at its least negative level since early November 2023,\u201d the firm notes.<\/p>\n<p>A day after the S&amp;P 500 hit yet another record close, reasons for ongoing optimism are welcome.<\/p>\n<p><strong><em>Corrections &amp; Amplifications:<\/em><\/strong> The yield on two-year Treasury debt was 19.3 basis points higher than on three-year debt late on Wednesday. An earlier version of this article incorrectly described the figure as the spread between two-year and 30-year debt.<\/p>\n<p>Write to Teresa Rivas at teresa.rivas@barrons.com<\/p>\n<\/p><\/div>\n<\/div>\n<p>Read the full article <a href=\"https:\/\/www.marketwatch.com\/articles\/stocks-two-year-yield-2f362a71?mod=investing\" target=\"_blank\" rel=\"noopener\">here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Crystal balls that can truly portend the future are scarce, but that doesn\u2019t mean investors are out of luck when it comes to predicting the market\u2019s trajectory. Treasury yields were a hot topic of conversation in 2023, as many strategists worried that the rising payout on the on the benchmark 10-year Treasury note would act [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":89838,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"video","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-89837","post","type-post","status-publish","format-video","has-post-thumbnail","hentry","category-investing","tag-featured","post_format-post-format-video"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.6 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Where Are Stocks Headed? 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