Investment Idea

The stock market in a good mood despite rising interest rates

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15/03/2021 | 5 min read

The ECB confirmed as the first major central bank continued economic stimulus through bond buybacks last week. But despite this and a lower-than-expected inflation rate in the US in February, the US 10-year government bond yield continued to rise to 1.6 percent on Friday, March 12. The market is deceptive, as soon as the fixed income market realizes that the rapid rise is now over, the market takes a step for another climb up.

The ECB confirmed as the first major central bank continued economic stimulus through bond buybacks last week. But despite this and a lower-than-expected inflation rate in the US in February, the US 10-year government bond yield continued to rise to 1.6 percent on Friday, March 12. The market is deceptive, as soon as the fixed income market realizes that the rapid rise is now over, the market takes a step for another climb up. On Friday, the market was pushed by rising producer prices in the US (PPI), expectations of a rapid transition for Covid 19 and a statement by President Biden that all states must prepare to be able to vaccinate all adults before 1 May. 


To some extent, the rise in interest rates is related to an anticipated rapid recovery of S&P500 corporate profits for Q1 and Q2 2021. Despite the interest rate turmoil that has put pressure on the S&P500 index and other stock exchanges in recent weeks, the price rise has continued. The S&P500 index, for example, advanced 2.6 percent over the past week.

As we have said many times before, it is not rising interest rates per se that affect the market, but the speed of the rise. Some hedge funds may collapse, which would lead to credit losses for the banks and possibly create a financial crisis. But so far, we have avoided this. The central banks have invested heavily in boosting the economy and do not tend to give up the fight that easily.

Since the price increase started during Q2 2020, the S&P500 index has deviated from the P/E-ratio curve by about 30 percent. The companies’ reports for Q4 2020 were very good, and the profit forecasts for 2021 have been revised upwards slightly. But the implicit P/E-ratio has also increased, which means that the market´s return requirements have been lower than before. As a result, investor’s interest rate sensitivity has also increased. It turned out at the end of last week when tech stocks first went up at lower interest rates and then rebounded when the interest rate rose again.


Excess liquidity in Europe gives virtually zero returns and in the US 1-2 percent. So, stocks are still doing well in that comparison. In addition, central banks are more likely to prevent excessive interest rate increases through intervention. The ECB was first out on Thursday, March 11, signaling an increased pace in bond repurchases. Interest rates both in Europe and in the United States fell back on the ECB’s message. A bond issue in the US on Thursday 11 March also met good demand. But then the 10-year US Government bond yield rose again to 1.6 percent on Friday, which favored bank shares and disadvantaged the tech sector.

There is an uncertainty about how much of Biden’s helicopter money to US households (USD 1400 per person) will be used for consumption and thus increase inflation. Opinion polls suggest that US households will save some of this support.


Bond investors have taken greater account of rising interest rates than the stock market. A small gap has formed between the HYG (an ETF for corporate bonds with lower credit rating) as the blue line and the S&P500 index as the red line in the chart below. Historically, the two indices show a very good correlation.


High expectations ahead of the Q1 2021 reports

 We are still only in the middle of March and the next quarterly reporting season is thus a few weeks away. But expectations for Q1 2021 are at high levels, as we have illustrated in the diagram below. The comparison with Q1 2020 will be quite easy to surpass since this it was this quarter when the first shutdowns due to the Corona pandemic was made. Then the comparison will be even easier when Q2 2021 is to be set up against Q2 2020. The revenue and earnings recovery forecasts look very strong during the first half of 2021. At least in Europe (the S&P500 companies’ exposure to North America is 60 percent) it feels like more of the recovery will occur in the second half of 2021.

The net decline in 2021 (11 percent for the full year in terms of profits) and the anticipated increase in 2021 is that the S&P500 companies are expected to increase both revenues and earnings by about 4 percent annually from 2019 to 2021. In other words, a recovery to the long growth curve has already been discounted this year.


If we study the purchasing managers’ index for the US, the Eurozone and China, we see that this indicator shows that the recession largely seem to be over. This is especially true for the United States, while the figures for the Euro Zone are still below 50 (above 50 corresponds to an expansion, while below 50 indicates a decline). This is a weighted indicator, where industry generally shows better figures, while the service sector continues to develop worse.

US PMI figures have risen in recent months. Something that speaks for an earlier recovery in the US is that the proportion of Corona vaccinated there is already up to 19 percent, against only 7 percent in the Eurozone. The UK, on the other hand, is in a very good position with 34 percent vaccinated. China’s tactics have been draconian initial shutdowns of society in early 2020. The country has thus coped with the Corona crisis better than the United States and Europe. But the weighted PMI for China are still lower than the US and slightly declining in the last two months.


However, the recovery in number of new jobs in the US is not as strong as the Purchasing Managers’ Index above. The correlation between new jobs in the US and the price development for the S&P500 index is very clear over a longer period. Like Europe, it is the service sector that contributes to the largest job growth. This sector has been more affected by the Corona restrictions compared to the industry. It is another argument for why the recovery should be strongest in the second half of the year rather than the first half of 2021.


All in all, our previous forecast of a volatile stock market characterized by interest rate turmoil remains. This is with a conviction of the central bank´s continued support which should provide a positive undertone for the market. A doping of the interest rate on top of the fundamental factors such as profit and job growth that cannot otherwise fully justify today’s stock market valuation. Below is VIX index with expected volatility over the next 30 days.



S&P 500 is supported from below by a rising EMA9 and MA20 right around 3 880-3 890 as the index is trying to set new highs. Also note how MACD has generated a weak buy signal:


The tech sector is more sensitive to rising interest rates. This is also made visible in Nasdaq that fell on Friday:


However, in the hourly graph below one can see that Nasdaq had a strong finish and closed on its intraday high above the falling trend line. Will the tech heavy index, Nasdaq, catch up with the broader S&P 500?


The FANG-companies’ share index did not manage to take back MA50:


In the weekly graph, the Amazon share has broken out on the downside from a neutral wedge-formation. The stock bounced last week off MA50, but the formation calls for further potential downside – to Fibonacci 50:


As can be seen in the daily graph below, Amazon is supported on the downside by EMA9. Also note that MACD is close to generating a weak buy signal:


The Tesla stock managed to bounce nicely on Fibonacci 61,8 but is now struggling with a falling MA20. MACD has generated a weak buy signal. In case of a break on the upside, MA50 and Fibonacci 23,6 around 770 USD can be next…but a continued increase in interest rates will not serve in favor of this move:


In Sweden, the OMXS30 index is increasing close to exponentially. The index composition (industrials and banks) may be one explanatory factor to the strong move:


The rising trend is not as convincing. Note that two dojis was created in the row, indicating uncertainty on direction:


The USD strengthened against the euro on Friday. Will the currency pair test a rising MA200 once again?


The Brent oil price is in a strong rising trend and is now trying to break up above the 70 USD per barrel-level:



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