Investors regain confidence in US stock market as Treasury yields stabilise

Investors have shown confidence in the US stock market after a month-long selloff. The relationship between stocks and bonds has been a tight one in recent months, with equities falling as Treasury yield climbed to a 16-year high. Higher yields offer investment competition to stocks while also raising the cost of capital for companies and households.

However, the dynamics have reversed following the news of smaller-than-expected US government borrowing and signals that the Federal Reserve is nearing the end of its rate hike cycle.

Also read: 6 things that changed for the stock market overnight

The recent stability in Fed rates has helped the other asset classes, leading investors to chase performance through year-end.

Yields on the benchmark 10-year US Treasury, which move inversely to bond prices, are down about 35 basis points from 16-year highs hit in October. Meanwhile, the S&P 500 surged 5.9% in the past week, its biggest gain since November 2022. The index is off around 5% from its July peak, though up nearly 14% year-to-date.

Also read: US Fed Policy: FOMC votes unanimously to keep key rates unchanged at 5.25-5.5% for second straight meeting

Besides, active money managers’ exposure to equities is at its lowest level since October 2022, providing an attractive opportunity for contrarian investors.

The rebound in stocks has been fueled by an extremely oversold market, a strong economy, and a dovish stance from the Federal Bank.

Bullish sentiment is further boosted by the US employment data, which suggests that the labour market is cooling and supports the case for the Fed to hold off on further rate hikes.

The US employment data showed a slight gain in the unemployment rate and the smallest wage increase in 2-1/2 years, suggesting that the labor market is cooling, bolstering the case for the Fed to stay its hand. The S&P 500 closed up 0.9% on the day.

Of course, plenty of investors remain hesitant to return to stocks just yet. Technology bellwether Apple Inc. on Thursday was the latest of the market’s massive technology and growth stocks to offer an underwhelming outlook. The iPhone maker gave a holiday sales forecast that was below Wall Street estimates. At least 14 analysts cut their price targets for the stock, according to LSEG.

(With Reuters inputs)