Santoli’s Tuesday market notes: Familiar 'sell growth stocks' reflex kicks in as yields surge

Published Tue, Sep 28 20211:09 PM EDT

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. The third yield surge and violent growth-to-value rotation of the year comes with complications along multiple policy fronts, making for a messy market narrative but so far simply pushing the main indexes back into last week's chop zone. The lift on government-bond yields is global, as are the shortage-driven price pressures. The shape of the 19-year German bond yield chart is pretty much the same as that of the U.S. 10-year. Still way short of worrisome absolute yield levels, but it's a decent prod for the familiar "sell growth stocks" reflex that has outsize impact on the S & P 500. The index is now about 1% above last week's intraday low, which itself was just a 5% drop from the record Sept. 2 high. As noted last week, a year ago we had a similar setup but with wider amplitude (10% drop from Sept. 2 peak, 8% to 9% bounce and a retreat to retest around the 100-day average). The rotational action is stark, but not new. Here's the S & P 500 Pure Value index relative to the Nasdaq 100 this year. Cyclicals and value corrected from June-September. That has been the set-up that priced in a lot of the delta summer slowdown story. We should note that the relationship of higher yields to lower growth-stock prices has a quantitative academic rationale behind it, but ultimately, it's not some law of nature. Seems here that some extra boost to Big Tech's valuation premium has been sustained using a cover story of "low absolute rates and negative real yields inflate the value of tech's consistent cash flow streams." So a turn higher in real yields triggers the sell mechanism in the short term. Maybe a fine excuse to reallocate toward cyclical/reflation assets. But nothing specific about 1.5% Treasury yields computes with any precision to, say, a 25x forward P/E vs a current 27x for the Nasdaq 100. Not many outright winners today, of course, with energy stocks up small and regional banks hanging in there. Taking down exposures across the board as bonds offer no cushion. The yield action and inflation story (home prices ripping, power prices not letting up) exacerbated by nagging concerns over corporate margins and the setup for third-quarter earnings. Total absolute numbers might still be too low, but analysts' revisions have weakened and will likely be less of an across-the-board beat-fest by companies. Debt-ceiling/budget gamesmanship not helping but it's hard to read the action today as directly a debt-ceiling tantrum. Treasuries would almost surely rally rather than sell off in a true panic of that sort. Questions about the makeup of the Fed (two hawkish/inflation-fearing regional presidents resigning, harsh words toward Powell on the Hill) also no help but still at the level of noise. There's a faint whiff of 2011 out there – questions about sustainability of an economic rebound, oil surging, U.S. debt ceiling drama. Back then the ECB erred in hiking rates. That won't happen now, though the market is surely clenched up for marginally less-generous central bank policy along with a softer economic footing, a combination that has given the markets a hard time in the past. Still, with reopening momentum in the U.S., tight job market, income gains, record household net worth, flush corporate cash flows, it's tough to be too scared about where this is all starting from. Market breadth is poor today but not quite a headlong liquidation. 1:3 up:down volume on NYSE, worse on Nasdaq. Equal-weighted S & P 500 outperforming, with mega-caps down well over 2% as a group. VIX is perking up but not as responsive to this sell-off as last week's because we were just at these levels. A return to last week's S & P 500 lows with a lower VIX than the 27.5 level printed last week would be an OK sign for the bulls.

A trader works on the floor of the New York Stock Exchange (NYSE) in New York, Sept. 20, 2021.

Michael Nagle | Bloomberg | Getty Images

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics.

The third yield surge and violent growth-to-value rotation of the year comes with complications along multiple policy fronts, making for a messy market narrative but so far simply pushing the main indexes back into last week's chop zone.