Cyclical stocks and Treasury yields rise, broader market cools off [19-Feb-21]

It was a good week for the financial and energy stocks, as growth/inflation expectations increased, but it wasn't so great for the growth stocks that were previously supported by really low interest rates. The Nasdaq Composite fell 1.6%, the Russell 2000 fell 1.0%, and the S&P 500 fell 0.7%. The Dow Jones Industrial Average (+0.1%) ended the week slightly higher.

Interest rates were still low from a historical perspective, but the quick ascent in long-term rates raised valuation concerns this week. The 10-yr yield rose 15 basis points to 1.35% amid continued selling interest that was supported by a pro-cyclical news cycle. The 2-yr yield increased one basis point to 0.11%.


Briefly, investors received retail sales and producer inflation data for January that exceeded expectations, the latest unemployment data painted the case for additional fiscal stimulus, Treasury Secretary Yellen reiterated the "think big" approach to stimulus, reports suggested that the U.S. will double its vaccine supply in the coming weeks, and earnings reports continued to beat expectations.


The top-weighted information technology sector dropped 1.9%, which weighed heavily on index performance given the sector comprises about 28% of the S&P 500's market capitalization. The health care (-2.5%), utilities (-2.0%), and consumer staples (-1.1%) sectors also posted noticeable declines.


Conversely, the curve-steepening activity in the Treasury market was a boon for the bank stocks within the financials sector (+2.8%), while the energy sector (+3.1%) continued to rally from a low base. Oil prices were volatile after a winter storm forced many refineries in Texas to temporarily shut down.


The cyclical materials (+0.9%) and industrials (+0.7%) sectors were the other two sectors that closed higher for the week.


From a price action perspective, the S&P 500 didn't move all that much this week, even though it closed lower in every session. This suggests the market entered a consolidation phase in which it absorbed the higher rates and cyclical rotation without hurting overall risk sentiment.


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