ROTATION FROM GROWTH TO VALUE CONTINUES AS TREASURY YIELDS HIT ANOTHER HIGH FOR THE YEAR
ROTATION FROM GROWTH TO VALUE... One of the side-effects of rising bond yields has been a rotation out of technology-dominated growth shares into more cyclical value shares. Chart 1 shows the S&P 500 Growth iShares (IVW) pulling back over the last week and trying to stay above its 50-day moving average in morning trading. The IVW is dominated by large technology stocks that account for 42% of its value. Because of their high valuation, tech shares are especially vulnerable to rising bond yields and are leading the pullback in stocks. Chart 2, however, shows the S&P 500 Value iShares (IVE) rising to a new record. It's being led higher by financial shares which are its biggest sector (20%). Financial shares, and banks in particular, are benefiting from rising bond yields. The IVE is also getting help from economically-sensitive energy and industrial shares. Ratio analysis shows the recent rotation more clearly.


RISING YIELDS WEIGH ON TECH SHARES...The daily bars in Chart 3 plot a ratio of the S&P Growth iShares divided by S&P Value iShares since last spring. The green line overlaid on the ratio bars show the rising 10-Year Treasury yield. The growth/value ratio peaked in early September and has since fallen to the lowest level in eight months. Bond yields bottomed last August and have been rising since then; while tech-dominated growth stocks have underperformed value. There are always two components to a ratio. Weak technology stocks have been the main drag on growth shares because of their high valuation. While more economically sensitive stocks groups like energy, financials, and industrials have led value shares higher. That makes sense since optimism on the economy with higher inflation is helping drive yields higher. With bond yields climbing again today, the three top performing sectors for the day are energy, industrials, and financials; while technology is the one of the day's weaker sectors. That also helps explain why the Dow and S&P 500 have held up better than the Nasdaq market during this week's modest pullback.
