Falling treasury yields sparks growth vs. value stocks debate

You choo-choo-choose value stocks for 2021? Think again.

Early this year, a rise in treasury yields sent growth stocks crashing — leading to a rotation into value stocks. But rates are falling again — jeopardizing the future of value stocks, and bringing the attention back to growth stocks.

When yields fall, tech rises

The 10-year Treasury yield (a.k.a. the interest rate on government loans) is a widely used indicator of investor confidence in the economy. Falling rates have many implications:

• Lowers investor confidence in the economy.
• Incentivizes investors to shift into stocks, away from bonds — which have a lower return as interest rates fall.

Most importantly, lower rates benefit growth stocks. The yield currently sits at 1.37%, a 25% decrease from its high of 1.77% in mid-March. Since yield rates began falling in May…

• Technology share prices rose nearly 5% more than any other sector.
• The financial sector and other sectors benefiting from the recovery (with the exception of oil) have been flat, or even negative.

The big 5 gets bigger

The five biggest tech companies (Apple, Amazon, Facebook, Alphabet, and Microsoft) have grown a combined $1t in market value since the start of June – with no signs of slowing:

• Apple, Microsoft, and Amazon’s stock grew an average 18.6% this year.
• Alphabet and Facebook are both expected to post 50% sales growth when second-quarter earnings reports are released.

Tech stocks got off to a slow 2021 start, with the S&P 500 Technology Index growing by only 1% from January to mid-May. Since then, it’s shot up 15%.

According to Goldman Sachs, slowing economic growth will lead to strong performance from growth stocks (including tech) in the second half of the year – but not all investors are convinced.

Investors: Watch this breaking point

Investors have a dilemma: the hot debate in the market is whether growth or value stocks are the play right now, and the answer depends on how investors think Treasury rates will change moving forward.

According to Matt Maley, chief market strategist of Miller Tabak (via Reuters), there’s one indicator that investors should watch for  – 1.3%.

• If the rate stays below 1.3%, “growth over value has returned and it is not just a head fake.”
• Last week, the rate flirted with the breaking point – dipping below 1.3% before rising back to 1.37%.

Head fake or not, investors should keep a close eye on Treasury yields over the next few months as part of their investment strategy.