Stocks Drop As Yields Surge Higher And Algo’s Take Over

 | Sep 28, 2021 02:00AM ET

Stocks finished the day lower, with the S&P 500 dropping by roughly 30 bps and the Qs dropping by 80 bps. Small caps rallied, with the Russell jumping by around 1.5%. 10-year yields were up to approximately 1.5% today, which sent the algo’s into overdrive buying the typical reflation names. The problem is that yields are no longer rising because of inflation or more substantial growth expectations. They are rising due to the FOMC meeting and expectations that the Fed will begin the tapering process.

Economic growth has moderated quite a bit, and current estimates call for third-quarter growth of 3.2%, based on the Atlanta Fed model. At this point, given that consensus analysts’ expectations had been for 7% growth when the quarter started, we have to wonder if the slower growth rate has correctly been priced into the market. If not, then this whole dynamic of buying financials, materials, industrials, etc., may not prove to be the correct one.

h2 Yields/h2

We will see if yield can get through the 1.51% region; I am hesitant to say they will. Rates around the globe are very low, and growth rates are moderating. Unless we see an uptick in rates globally, I would be surprised to see the 10-year advance much further. I do happen to think the short end of the curve will rise, which will flatten the curve out.