Rising rates spook the markets in the first two months of 2021

Robert Teeter, Managing Director and Head of the Investment Policy and Strategy Group, joins Worldwide Exchange to discuss the markets as we enter March of 2021. Subscribe to CNBC PRO for access to investor and analyst insights: https://cnb.cx/2Vtntx6

The tug of war between stocks and rising bond yields could set the tone for the coming week, particularly if positive economic data continues to push Treasury yields higher.

Friday’s February employment report is the highlight of the week’s data and an important current look at the impact of the virus on the economy, after just 49,000 jobs were added in January. For February, economists expect to see 218,000 jobs added, and the unemployment rate should stay the same, at 6.3%, according to Dow Jones.

Fed speakers are also a major focus of the markets, after the rapid rise in bond yields this past week had the feel of a runaway train. Fed Chairman Jerome Powell is the most important speaker, when he appears at a Wall Street Journal summit Thursday.

“If he wants to stop this rise in rates, he does have to say something. But he risks sounding hawkish. The more dovish he sounds, the higher rates will go,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. When the Fed is described as dovish, it means it is maintaining easy policy, such as keeping interest rates at low levels.

Some Fed watchers doubt the central bank will comment on the rise in yields any more than Powell did this past week when he said the move was the result of a strengthening economy. But bond pros say Powell could reinforce that Fed policy will remain easy for a long time to come.

The rapid runup in interest rates this month caught investors by surprise. The benchmark 10-year yield, which influences mortgages and other loans, was at 1.46% Friday afternoon, about 15 basis points, or 0.15%, above its level just a week earlier. After a big surge Thursday, the 10-year yield traded on both sides of 1.50%, which is the consensus view of where yields would be at the end of the year, not the beginning.

The fast move up in yields, which rise when prices fall, scared stock investors in the past week, evident in choppy trading and a big sell-off Thursday. The Nasdaq fell nearly 4.9% for the week, as technology shares were hit the hardest, but the S&P 500 was down about 2.4% for the week.

“I think it’s probably going to be a short-term tug of war,” said Sam Stovall, chief investment strategist at CFRA. Stocks have been reflecting optimism about the economy, and now they are being joined by bonds.

“People forget the reason why we’re looking at very high year-on-year increases in [economic] indicators. It’s that we were just entering the depths of recession ... and we are now in many measures just getting back above pre-pandemic levels,” he said.

Stocks on average have performed poorly in February, but this year they were higher, lifted by an improving economy, the vaccine rollout and the prospect of a big stimulus package. The Biden administration’s $1.9 trillion stimulus package should go to a Senate vote in the week ahead.

The expected economic boost from stimulus has also been driving yields higher, and it has also heightened concerns about inflation.

“March is actually a pretty good month for the market. It is the fourth best in terms of average price change. It is the fourth best in frequency of advancement, yet it is the fourth lowest in terms of volatility,” Stovall said.

The average gain in March since World War II was 1.1%. But in the 14 years, like this one, when stocks were lower in January but higher in February, the S&P rose an average 1.9% in March.

For February, the S&P gained 2.6%, while the Nasdaq lagged with a 0.9% gain. The Dow rose 3.2%, and the Russell 2000 was up 6.1%.

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