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Rate Fears Continue…

March 08, 2021
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Monday Morning QB - Market Observations:

  • Rising Rates Combined with a Strengthening Dollar Pattern Continues
  • Fed Chairman Powell Interviewed at a WSJ Jobs Summit - Investors Look for Direction…
  • Oil Prices Climb after OPEC & Russia Agree to Maintain Cuts in Oil Production
  • U.S.Economy Adds 379,000 Jobs…More Evidence of Recovery
  • NASDAQ Moves into Correction Territory (Down 10%)

Monday Morning QB - Market Performance:

The major U.S. benchmark indexes finished the week mixed as interest rates continued to climb. The rise in rates weighed on growth stocks, while value stocks managed gains.

The Dow Jones Industrial Average climbed 564 points finishing the week at 31,496—a gain of 1.8%. The technology-heavy NASDAQ Composite declined a third consecutive week giving up -2.1%.

By market cap, the large cap S&P 500 added 0.8%, while the mid cap S&P 400 rose 0.7% and the small cap Russell 2000 declined -0.4%.

Fed Chairman Powell Nixes Talk of Rising Rates Two Weeks in a Row

Two weeks ago, the Fed chairman testified in front of Congress. Last week he was interviewed at the Wall Street Journal Jobs Summit. Whatever reassurance the market was hoping for regarding rising rates, it did not get it!

According to Fed Chairmen Powell their current policy is appropriate despite worries over inflation and troubling signs in the bond market.

Fed Chairman Powell reiterated his testimony from two weeks ago, stating “Today we are a long way from our goals of maximum employment and sustained inflation averaging 2% over time.” For more on the current federal reserve policy, refer to the March 1st MMQB. https://www.haydenroyalwilmington.com/blog/stocks-drop-as-interest-rates-rise

Fresh unemployment numbers from Friday gave hope for continuing to see strength in our economy. Non-farm payrolls increased more than expected. The U.S. added 379,000 jobs in February (biggest gain in four months), leaving the current unemployment rate at 6.2%.

Chairman Powell believes the real unemployment number is actually lower, stating that the U.S. has around 10 million fewer jobs than before the pandemic. One of his stated goals is a labor market at full employment. Which he says is highly unlikely to be reached this year.

Taking Fed Chairman Powell at his word, there are a lot of Americans who need to be gainfully employed before we should expect a rate increase out of the Fed.

The Velocity of the Increase in Rates Seems to be the Main Concern

The speed of the rise in Treasury yields has created more uncertainty than if the rise had occurred at a slower pace. The 10-year Treasury jumped to 1.62% on Friday. The 10-year Treasury began the year at 0.92%.

Chairmen Powell viewed the climb in long-term rates as notable and it did catch his attention.

Just acknowledging the rate increase sent many investors to speculate the Fed might intervene at some point soon if the rising rates continue. However, he did not give any signal that we should expect a policy change from the Federal Reserve.

The markets are just going to have to work through this on their own.

The Market Dilemma Created from Economic Factors

The general view on what rising rates mean is it is a signal that investors are optimistic for further recovery in the economy.

The expectation of more stimulus soon, followed by a vaccinated pubic getting back to normal, will help drive up business activity sometime this summer.

Much of the current economic data is good news, even without a full reopening of the economy.

A great example of our current rate dilemma came last week with the release of the ISM Manufacturing activity report. The Institute for Supply Management (ISM) reported its manufacturing survey climbed 2.1 points to 60.8—a three-year high.

Readings over 50 indicate growth, while readings over 55 are considered exceptional. In the report, new orders, production, and employment all improved last month.

The biggest worry of the ISM survey respondents was shortages of key materials such as lumber and semiconductors which are pushing prices higher and in some cases restricting production.

Those shortages could lead to an increase in inflation and hinder the recovery. A senior executive at a maker of wood products stated, “Prices are rising so rapidly that many are wondering if [the situation] is sustainable.”

Another concern, as well as these possible key material shortages, is that we simply may be jumping the gun on the recovery a bit too early. Maybe we are not out of the proverbial woods yet in terms of virus spikes until herd immunity is achieved!

With the timing of the path ahead unclear, market volatility is the current result.

The answers to the rate dilemma are in the future.

All anyone can do today is speculate and we are not in the business of investment speculation. Our discipline is based on seven rules and we will make adjustments accordingly.

The Potential End of the "TINA" Trade

With ultra-low interest rates investors found themselves without an interest-bearing asset where they could park their money.

Why let someone use your money when they are not willing to pay you for using it?

This issue created the "TINA" trade – Why buy stocks? Because There Is No Alternative.

The quick rise in interest rates may finally offer an alternative to buying stocks (TINA trade).

As rates continue to rise, interest-paying investments will have more appeal.

In response to the pandemic, the Federal Reserve reinstated their zero-rate interest policy and money has generally chased and pushed the stock market higher since.

We will continue to watch this carefully for evidence of a market change or just a temporary step back for stocks.

One Final Thought…

For now, volatility appears to be back in full force.

Remember, volatility is not necessarily bad. Volatility can occur around inflection points until some clarity is revealed.

As a reminder - one of our seven rules to investing is- “Volatility is the cost of building wealth over time.”

Volatility leads to a reset by washing some people out of the market while bringing in people who have been waiting to invest but felt like the stock market got a little too ahead of itself.

Should volatility lead to losses, we will take appropriate actions. We will do the same if the current volatility ends in another market surge.

Sometimes when investing, you just have to be patient!

If you have any questions or concerns, do not hesitate to call. We are here to serve.

Have a great week!

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)
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