The rotation into technology stocks and other pandemic winners as banking jitters rattled markets in March makes it difficult to tell if investors think the U.S. economy looks headed for a recession or not.
TS Lombard’s strategists Skylar Montgomery Koning and Andrea Cicione said the move into rate-sensitive stocks like tech and communications (see chart) looks misguided, in a Wednesday client note.
Pressure on energy, financials and more reflects investor concerns that monetary policy will sink the U.S. economy into a recession
TS Lombard
While investors appeared less worried about a full-blown banking crisis unfolding than a week ago after regulators in the U.S. and Europe stepped in to shore up confidence in the banking system, the TS Lombard team said the subsequent rally in technology stocks is “largely ignoring” the pressure of tighter lending standards on the U.S. economy.
“The main implication of banking-sector distress is the accelerated tightening of lending standards that was already under way, squeezing the economy and weighing on growth,” the TS Lombard team wrote.
The financial sector of the S&P 500 index SPX, -1.65% was up 1.3% for the week through Wednesday, according to FactSet, even though shares of First Republic Bank FRC, -15.47% were 42.1% lower for the same stretch. Stocks tumbled into the close on Wednesday after the Fed increased its policy rate by 25 basis points as expected, but Fed Chairman Jerome Powell waved off the possibility of rate cuts this year.
Concerns about a potential U.S. recession, the TS team argued, has been reflected in recent downward pressure in commodity markets, with energy commodities down about 10% and industrial metals down roughly 3% in the past week-and-a-half. Prices for the U.S. benchmark West Texas Intermediate crude CL00, +0.36% ended higher Wednesday, at $70.90 a barrel, but were still about 9.2% lower in March, according to FactSet.
Meanwhile, the TS team pointed to the recent outperformance of communication and technology stocks as a sign that investors were considering the possibility of “deep” interest-rate cuts from the Fed in the second half of this year, but not the likely impact a recession would have on earnings and growth.
Technology stocks boomed during the easy-money days of 2020 to 2021 as a bazooka of monetary and fiscal support was fired off to help stabilize households and the economy. They were hit hard last year as the Fed began to raise rates at the quickest pace in decades.
Against that backdrop, Treasury yields, including the benchmark 10-year rate TMUBMUSD10Y, 3.444% for the economy have climbed, up 3.47% on Wednesday from a 1-year low of 2.3%.
The tech-heavy Nasdaq Composite Index COMP, -1.60% was up1.9% in March through Wednesday, but up 11.5% on the year, outperforming the two other main stock indexes, according to FactSet.
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