S&P 500 hit fresh record highs this week despite rising yields that have facilitated a correction in some parts of the stock market recently.
Fundamental analysis: All about bond yields
Blue-chip stocks like Apple, Tesla, and Amazon have been lagging behind lately as investors focus on cyclical stocks that thrive during the economic recovery. S&P 500 and Dow both hit new highs in recent days while the tech-heavy Nasdaq Composite diverged.
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Even though the Nasdaq moved up 3% last week, the index remains 5.5% in the red this month. The Federal Reserves scheduled meetings Tuesday and Wednesday and this will likely guide the bond market.
Bond investors are waiting impatiently to see whether the central bank will make changes to the interest rate outlook, which at the moment does not involve any hikes through 2023.
“The markets have way too high expectations around what the Fed is going to do or say,” said Gregory Peters, Managing Director and Head of PGIM Fixed Income Multi-Sector and Strategy.
“I think the message is going to be consistent.”
Peters said he expects Fed Chairman Jerome Powell to remain dovish and said that it is unlikely he will provide a time frame on when the Fed will tweak its bond-buying program or other policy.
“The economy is going to be unbelievably strong this year — deficit spending, reopening, vaccines,” Peters added.
Bond yields rallied sharply last month, causing stocks to lag behind as investors adjusted to increased rates.
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Technical analysis: Levels to watch
S&P 500 price has printed 3981 today – a new fresh high for the index. After rising to 3950, the index corrected to 3723 as higher yields facilitated the de-rating process and a rotation lower.
On the upside, the buyers are continuing to target 4135, which represents the 161.8% Fibonacci extension line of the coronavirus-related selloff. On the downside, the low 3600s offer support that will come in play in case bond yields continue to advance.
The upcoming Fed meeting could boost the bond market, which could support growth stocks next week, according to strategists.