S&P 500 Index: Rising bond yields to be the catalyst for a down move – Charles Schwab

US stocks fell sharply on Thursday as Treasury bond yields rose. The S&P 500 declined 2.5% which put the index very close to its intraday low from earlier this week, yet it remains nearly 3% higher in February. Economists at Charles Schwab note that higher bond yields are set to pressure equities. 

Key quotes

“The market’s recent success had also led to increased speculative fervor, which is a risk. Heightened optimism doesn’t necessarily indicate an imminent down move, particularly when there is no negative catalyst. However, rising bond yields appeared to be just such a catalyst.”

“Higher bond yields tend to put downward pressure on equity multiples. Richly valued growth sectors are now under the most pressure. With 4Q 2020 earnings season winding down, there will be less earnings growth visibility in the near-term, so this pressure may continue.”

“Technical support is being tested. S&P 500 stopped just short of touching its 50-day simple moving average (SMA) of 3,805 for the second time this week.”

“The Cboe Volatility Index (VIX) rose 36% on Thursday to close above 29 and moved above its 50, 100 and 200-day SMAs for the first time in three weeks. At its current level, the VIX is implying daily moves in the S&P 500 index of 60 points per day in either direction.”