Inside Markets — Catalysts Ahead
Catalysts Ahead
October 28, 2024
Treasury yields have been rising over the last few weeks in response to improved macro data and election dynamics. Several months ago, we flagged higher yields as an underappreciated election risk given the potential for the event to focus attention on US fiscal concerns. This week’s heavy auction schedule and Treasury refunding announcement push the topic further up the list of potential tail risk scenarios. Fiscal concerns began to seep into borrowing costs at this time last year until the theme was interrupted by a deceleration in October YoY CPI inflation during the second week of November.
A slow and steady climb in bond yields is unlikely to cause a spike in equity volatility, which we continue to view as the primary near-term risk for equity investors. The current ~21.5x forward multiple on the SPX was ‘earned’ during a prolonged period of subdued volatility. Elevated levels of equity volatility will lead to multiple compression and most of the recent episodes started on a sudden spike in bond market volatility. But a slow/steady rise in bond yields with curve flattening has clear implications for equity sector and style performance, which explains the recent outperformance in secular growth stocks. There is a point where a slow/steady rise in bond yields creates a problem for the broad equity market. In 10-year terms, that level is 5%.
Fund flows begin to improve with today kicking off the best seasonal period of the year. Historically, Q4 is the strongest quarter of the calendar year and the next two weeks (starting today) have historically been the strongest two weeks of the quarter. This is also the case during election years. The largest two sources of equity supply (mutual funds and pension funds) will conclude year-end/month end selling this week, while this year’s largest demand source (corporate buybacks) returns with ~50% of US public companies now in an open buyback window.
Read more |