Companies sensitive to changes in the yield on 10-year Treasury notes are leading the market, suggesting that some equity investors have been premature in anticipating higher interest rates.
The Rate-Sensitive Basket of stocks maintained by Goldman Sachs Group Inc. has outpaced the Standard & Poor’s 500 Total Return Index by 4.5 percentage points since Dec. 31, trading near levels last reached in August 2011 on a relative basis. Meanwhile, yields on 10-year Treasury notes have fallen this year to 1.74 percent as of 9:25 a.m. in New York from 1.76 percent on Dec. 31 and are about 1 percentage point below the August 2011 peak.
This suggests that equity investors may be “jumping the gun a bit” in predicting the Federal Reserve will shift from its accommodative policies, said Tim Ghriskey, chief investment officer of Solaris Asset Management LLC and co-founder of New York-based Solaris Group, which oversees more than $1.5 billion in assets. That’s because the index is designed to rise faster than the broader market when interest rates are rising and historically has tracked such changes, he said.
‘False Start’
“We may be witnessing a false start by some equity investors as there’s been no sign of inflationary pressure that would prompt the Fed to raise rates in the near term,” Ghriskey said. The Goldman Sachs basket -- comprised of 50 companies including ethanol maker Valero Energy Corp. and gravel producer Vulcan Materials Co. -- probably will lag behind the broader market to align with current bond yields, given the “strong correlation” among these assets, he said.
“The relative outperformance of these stocks now shows signs of waning,” said Jim Stellakis, founder and director of research at Greenwich, Connecticut-based research company Technical Alpha Inc. and also a chartered market technician. Since the Goldman Sachs basket traded to a so-called double-top in February and March relative to the broader market, investors have been allocating less money into this group as a seven-month rally appears to have stalled, he said.
“Some equity investors may have gotten ahead of themselves” as they resorted to an “old Wall Street saw that when the Fed is printing money, there has to be inflation,” said Rob Morgan, who oversees $1 billion as chief investment strategist in Exton, Pennsylvania, at Fulcrum Securities LLC. This seems premature because “there is just no evidence of that in the inflation pipeline.”
Below Target
The central bank’s preferred gauge for price increases, the personal-consumption expenditure index, rose 1.3 percent in February from a year earlier and has averaged 1.8 percent since the 18-month recession ended in June 2009, according to data from the Commerce Department. That’s below the Fed’s 2 percent target.
Investors probably began to anticipate late last year that interest rates would rise, swayed in part by an apparent divide among Federal Open Market Committee members about when to end the central bank’s $85 billion monthly bond-purchasing program, Morgan said.