Posted by lplresearch
Bond markets have had quite a ride since Election Day. The 10-year Treasury yield had been climbing very slowly in the months leading up to the election as the economy improved, but possibly also in anticipation of a potential Democratic sweep that could lead to a larger stimulus package. As shown in the LPL Chart of the Day, as polls were starting to close on Election Day, the 10-year Treasury yield had moved above 0.90%, a level at which it had not closed since June and then only barely. But then early results out of Florida and North Carolina let us know that this would be a closer election than many thought, and yields fell dramatically.
“Stock investors seemed to embrace the prospect of divided government as results came in, but bond traders were focused on other things,” said LPL Chief Market Strategist Ryan Detrick. “Part of it may have been weakening stimulus prospects. Part of it might have been increased election uncertainty as the race tightened. Either way, it looked like the reflation trade was off the table.”
The “reflation trade” was simply market rotation that reflected improving prospects of a return to economic normalcy, potentially with the help of government stimulus. Leading up to the election, It was reflected not only in yields, but the relative performance of value style stocks and small caps, which had delivered improving relative performance in September and October after lagging sharply on a year-to-date basis through August.
As the new week opened on Monday, however, we were reminded that stimulus prospects were not the only signal for a reflation trade. Preliminary reports of encouraging vaccine trial results pushed the 10-year Treasury yield above election-day highs. At the same time, a badly beaten up Russell 1000 Value Index had its single best day versus the Russell 1000 Growth Index in its history. Small caps, not surprisingly, also had a strong day. Even as early broad stock market enthusiasm settled down to just a solid day of returns, yields largely held on to most of their early move.
Is this a sign of things to come? Really, it’s an extension of a trend that’s been in place since early September, but we would caution getting too excited about a single day. We do think interest rates are likely to extend their slow march higher, and we recommend bond allocations emphasize below-benchmark rate sensitivity. (Bond prices fall when interest rates rise.) For value and small cap stocks, it may be more part of the process of a slow thaw. In response to that, we did recently upgrade our view of small caps to neutral and do favor the more value-style oriented material sector. That single day of trading did at least signal that one potential avenue to a more durable return of the reflation trade is clear, as the work of doctors and scientists continues to have the potential to be a major market catalyst.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
All index and market data from FactSet and MarketWatch.
This Research material was prepared by LPL Financial, LLC.
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
- Not Insured by FDIC/NCUA or Any Other Government Agency
- Not Bank/Credit Union Guaranteed
- Not Bank/Credit Union Deposits or Obligations
- May Lose Value