It may be early May, but a top strategist predicts a bumpy month for stocks.
Stocks rebounded on Wednesday after selling off Tuesday. Growth stocks, which have been hardest hit, are down 1% in just four trading sessions and they could be in more pain, said Mona Mahajan, senior US investment strategist at Allianz Global Investors.
“Growth actually took some leadership over the last month as government bond yields fell from 1.75% to below 1.60% today. I think that’s where investors really think we might are.” Beginning a reversal of that move, Mahajan told CNBC’s “Trading Nation” on Tuesday.
A rise in interest rates could be driven by a number of factors – a fully reopened economy in the summer months, sustained stimulus, and a marginal Federal Reserve, while spikes in inflation could help push 10-year government bond yields back up 1, 7%. Prices and returns move in reverse.
“That actually puts pressure on areas like technology and growth, which are seen as slightly longer-term assets. This also puts pressure on some of the bond proxy sectors like REITs and utilities,” Mahajan said.
The XLK technology ETF, for example, is down 5% from its late April highs. The technology sector is largely made up of growth stocks that investors will pay a premium on for future earnings potential. In comparison, the S&P 500 is less than 1% off its own record.
But not only growth stocks could come under pressure. Mahajan said the entire market could be due for withdrawal.
“The markets have done reasonably well since November last year, the parliamentary term, the launch of the vaccine, and we haven’t had a 5% or 10% correction,” she said. “Every year we tend to see one to three corrections in the broader S&P 500.”
A 5% to 10% pullback would bring the S&P 500 down to around 3,800-4,000. It hit a high above 4,218 on April 29 and is currently trading at around 4,178.
Rising interest rates could also end TINA’s investment strategy – an acronym for “there is no alternative” to stocks – Mahajan said.
“We have been in a low interest rate environment for 10 years since the great financial crisis. This really pushes investors out of the risk spectrum. In this case, there is no alternative other than owning stocks when interest rates are so low.” However, if we are now faced with an environment where 10-year returns are falling not just to 1.75% but also to 2%, 2.25%, investors may indeed have an alternative to stocks, “Mahajan said.
The 10-year Treasury note returned 1.59% on Wednesday. At the end of March it was quoted at 1.78%.
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