@theMarket: Cross Currents Confuse Investors
You would think that with a $1.9 trillion spending package, an increasing rate of coronavirus vaccinations, and a potential $3 trillion infrastructure package waiting in the wings, the market would be at record highs. That it is not should tell you something about the indecision plaguing investors.
When good news fails to impress, it usually means stocks (or at least some stocks) are headed lower. That should come as little surprise to readers. I advised investors to raise cash last month in preparation for what I see as a buying opportunity this month. The challenge — when do you put that cash back to work?
No one can call a bottom in stocks, so last week, I did advise readers to begin investing that cash "on down days." We have had a number of those this week. We have also seen stocks spike higher with little warning, so timing demands attention and patience. It is why I advise a simply buy-and-hold strategy for most readers, most of the time.
If you simply look at the S&P 500 Index, there appears to be little damage thus far to the averages. We are simply in a 100-point trading range. However, Nasdaq and the small-cap Russell 2000 Indexes are a different story.
Right now, we are in the worst technology selloff in six months. The NASDAQ 100 fell over 10 percent this month while small caps just fell to their 200-day moving average (before bouncing yesterday and today}. That makes sense, since what goes up must come down, or so the saying goes.
Both of those averages have outperformed considerably in the past. The Russell 2000 Index, for example, gained more than 40 percent over the last half year. NASDAQ, as you probably know, has been outperforming everything for years now.
Things changed the moment interest rates began to rise in February. It is one reason I advised caution back then, especially in those high-flying stocks that the Robin Hood traders and others had bid up to insane prices. Many of those companies were what investors considered "new age" stocks (think electric vehicles, solar, or 5G}, or "stay-at-home" stocks like the FANG names and other companies in the same space.
Rising interest rates, as I have explained, have a tendency to hurt earnings in these companies, which were already priced to perfection. At first, investors simply sold those winners and rolled the money into what is now called the reopening trades — airlines, hotels, restaurants, cruise lines, industrials, materials, etc. At the beginning of this quarter, valuations were reasonable, since the timetable for a resumption in economic activity was uncertain at best.
However, since then, here in the U.S., the accelerated pace of vaccinations, plus $1.9 trillion in government spending (thanks to the Biden Administration}, gave investors the confidence to pile into these "value" areas. Afterall, it is thought that they would benefit the most from the imminent explosion of economic growth, something which was suddenly thought to be just around the corner.
Inflation worries, and a potential third wave of virus cases, however, has recently put a damper on these expectations. Inflation is rising and no one knows just how high it will go. Higher inflation could damage earnings across the board, but more harm in some sectors than others. If you then throw in the possibility of a third wave of virus cases, the market suddenly has doubts of how sustainable the reopening trade might be. But the problem is that investors have already bid up many of these value stocks to prices that are higher than they were before the pandemic began.
Europe, which has proven to be a 2–3-week leading indicator for virus cases in our own country, is now shutting down again. The difference this time, in my opinion, could be that our efforts to provide vaccinations for our population are in full swing, while Europe struggles to establish an effective program. Just yesterday, President Biden has doubled his forecast (to 200 from 100 million} for vaccinations available by the end of May.
All of the above uncertainty is what I believe is behind the radical behavior we are witnessing this month in the stock market. This too shall pass. I am hoping by the second week in April we will have put all this indecision behind us. In the meantime, take advantage of any pullbacks to move into areas I have already recommended in the beginning of the year such as industrials, materials, financials, and energy among other commodities as well as small caps.
@theMarket: Rising Rates Create Headwinds for Stocks
The saga of rising interest rates in the long end of the U.S. Treasury market continued this week. Investors, fearing runaway inflation, sold both bonds and stocks. Will the selling continue, or Is this a buying opportunity?
It depends upon which asset class we are talking about. Yields on the 10, 20, and 30-year U.S. Treasury Bonds, I believe, will continue to rise. How far? It is possible that the benchmark "Tens" could finish the year at 2 percent. In the short-term, however, I expect yields to fall a bit on profit-taking.
Last week, I warned readers that the rise in rates was not over. I expected yields on the U.S. Ten Year Treasury Bond to hit the 1.70 percent level or higher. Currently, they are yielding 1.75 percent, which is a fairly steep move in less than a week. It is the speed of the ascent in yields that is most spooking equity investors.
But where is the Fed in all of this? The simple answer is that the Federal Reserve Bank controls short-term interest rates, while long term rates are determined by the buying and selling of you and me. But it goes further than that.
Investors have been conditioned over many years to expect the Fed to be pre-emptive in guiding monetary policy. If, for example, the FOMC board members believe inflation might be getting out of hand in the future, they will nudge rates higher now to head off that danger.
Not this time. The Fed, and its Chairman Jerome Powell, want inflation to rise and plan to wait until that happens before reacting. This is a new concept for market participants.
For the first time in a long time, the Fed is making employment its priority and not Wall Street. The real unemployment rate in this country is thought to be about 9 percent, depending on what data you look at. The Fed wants to let the economy grow until that number drops dramatically. If that means the economy grows "hot" and inflation rises for a quarter or two to achieve that goal, so be it.
The Fed believes that any sustained, long term rise in the inflation rate will only become a problem if wages start to rise and rise substantially. Consider that back in 2019, when the unemployment rate was as low as 3.5 percent (the lowest since 1969), the inflation rate was only 1.81 percent, despite wage growth of 4.6 percent. Given the still high rate of unemployment, it is hard to imagine that wage growth and any potential inflation it might cause will occur any time soon.
But what about the record rise in commodity prices, like food and energy? Isn't that inflationary? The Fed considers these price movements short-term aberrations. Consider the oil price, which can fluctuate by as much as 4-5 percent in a day. On Thursday, for example, crude fell 7 percent. The Fed is concerned with the long-term trends, while you, me, and Wall Street are focused on today, tomorrow, and at the latest, next week.
But who is to say that if the Fed waits to react to a 2.5 percent-3.5 percent uptick in the inflation rate, they will be able to put the genie back in the bottle? Can we trust the Fed to let the economy grow hot enough to employ America's workers without unleashing a new and damaging multi-year trend of inflation? The market seems to doubt that.
I advised investors to raise some cash in highflyers, mostly in the new tech area, in February because I believed this month would be volatile at best. That is proving to be the case. Over the next few weeks, readers should start putting that cash back to work on the market's down days.
@theMarket: Tech Stocks Rise From the Dead
The large cap technology sector bounced back this week as bond yields fell. It is a see-saw market filled with several cross-currents. But if you want to know where stocks are going, keep your eyes focused on the U.S. Ten-Year Bond yield.
In my last column, I explained how rising bond yields are like kryptonite to the continued performance of what I call "super tech stocks." Over the last two weeks, the NASDAQ 100, for example, experienced a 10 percent-plus down draft, as bond yields rose to 1.60 percent from 1.25 percent. Investors sold FANG stocks, and technology shares in new-era sectors, like solar and electric vehicles, and bought old economy stocks, like in energy, financials, and cyclicals.
This week, that trade reversed somewhat as bond yields stopped rising, drifted lower, and seem to be stabilizing around 1.50 percent -- until Friday. While the S&P and Dow Indexes pulled back a little in response, NASDAQ dropped 1.5 percent. The question is whether the rate rise in yields is coming to an end, or will we see yet another backup in yields as investors become even more concerned over future inflation.
There is no reason why the yield on the "Ten Year" couldn't rise further, in my opinion, maybe as high as 1.80 percent to even 2 percent later in the year. After all, that was where yields were on the Ten Year just before the pandemic. What could drive yields higher? Inflation concerns.
I believe the Federal Reserve Bank Committee is expecting the inflation rate to hit their long-term target of 2 percent in the next few months. Fed Chairman, Jerome Powell, has already said they would be willing (and happy) to see that happen. That would be a textbook and natural occurrence in any recovering economy. But what the Fed expects, and what the markets are prepared for, may be two different things.
"As long as yields rise gradually, and not all at once," say the experts, then investors can and will adjust accordingly. That remains to be seen. In this world of instant price reactions and compressed time periods, I am not so sure "gradual" is in the dictionary of today's traders. To them, a 25-30 basis point rise in yields could mean the end of the world. I fear a mad exit for the door could occur all at once at some point. It is a possibility, so be on guard.
The good news is that the $1.9 trillion American Relief Bill passed in what amounted to a one-party rescue of the American people. Not one Republican voted for the rescue plan, despite the fact that between 65-80 percent of Americans approved of the plan. The ink was barely dry on President Biden's signature, however, before investor attention turned to the passing of a future infrastructure package.
Unlike the relief package, which was passed through the budget reconciliation process, an infrastructure bill of real substance would require bi-partisan support. If that turns out to be a non-starter, President Biden could still provide some money ($300 billion or so), but nothing like the $2 trillion that would be needed to really address the nation's decrepit highways, bridges, seaports, and airports.
An infrastructure bill would actually provide a needed stimulus to grow the economy, while providing a real need that is long overdue. But it would also take longer to thread its way throughout the economy and would require a year or two before we would really see the impact in the data.
In any case, the prospect of such a bill will be enough to occupy investors' attention over the next few months. I suspect "infrastructure plays" will be bid up in anticipation of this potential government spending program. This happened four years ago, you may recall, when the Trump Administration announced their intentions to pass similar legislation. We all know that effort hit a brick wall, despite a Republican-held Congress and White House.
Today, with countries like China breathing down our necks, the U.S. is falling further and further behind in so many areas. We fiddle in bitter partisan politics, while the rest of the world plows ahead. A substantial infrastructure program would be a first step in stemming our economic slide.
In any case, we have two weeks left of volatility, so use the time to employ any excess cash you may have on down days. I expect stocks to regain their luster in April, so hang in there.
@theMarket: The Ides of March and the Market
It was a rough week in the markets. Investors were whipsawed throughout the week and finished down once again. I expect more of the same for investors this month.
However, I don't expect stocks to go straight down, find a bottom and then rebound. This downdraft is occurring at about the same time that markets sold off last year, but I do not expect the kind of severe correction we suffered through then. Overall, I am anticipating a 10-15 percent decline as I mentioned last week. Actually, as of Friday (March 5, 2021) morning we have suffered a 6.3 percent decline from the top on the S&P 500 Index futures contract. The pullback, by the way, is long overdue. I am hoping it will flush out some of the speculation and froth that were rising to dangerous levels among certain stocks.
The small backup in interest rates we have been experiencing in the last three weeks has been an excuse for a sell-off, in my opinion, but not a reason to fear the future. My evidence: we are on the cusp of an additional $1.9 trillion in fiscal stimulus, which may be passed by the Senate as early as this weekend. An even larger government spending program in infrastructure may also be in the offing in the coming months.
Of course, as I have been saying for a year, the key element to the future health and well-being of the economy, and the stock market, will be the country's battle to vanquish the coronavirus. Right now, thanks to the vaccination, and rapid distribution of the drugs by the present administration, that battle looks winnable in the months ahead.
But investors have not been waiting around for that to occur. A re-opening trade has been ongoing since the beginning of the year. Airlines, cruise lines, hotels, and casino stocks, among others, have all been gaining. That is an area where I would add some money in this pull back.
All my recommended natural resource plays have also been booming, led by energy. The bull market in commodities has a number of tailwinds that I believe will propel that sector even higher this year, but runaway inflation is not one of them. The present belief by a growing group of Wall Street analysts, namely that "inflation is here to stay so buy commodities" is too simple.
There is a big difference between expecting reflation (my opinion) and inflation, (or worse, hyperinflation). As global economies re-open, the demand for materials and other commodities should rise. If you throw in some supply chain issues and other pandemic-related conditions, sure, prices are going to rise, some substantially, but that is simply textbook economics. That doesn't automatically translate into an inflationary problem as so many are predicting.
It has been so long since we have had any real inflation, that there are investors out there that have never seen inflation in their professional careers. If you throw in the two-thirds of professional investors and traders who have also never experienced a rising interest rate environment, you have the makings of a perfect storm of inexperience, ineptitude, and chaos. I believe that is what we are witnessing in today's financial markets.
The Ides of March is actually on the 15th of this month and I expect to see a continuation of this chop fest at least until then, if not longer. The best declines are those that are sharp, short, straight down, and over before you know it. Unfortunately, I expect this correction to be different. There will be relief rallies like the pre-market 1 percent gains in the markets on Friday mornings followed by sharper down days. This kind of action should keep us all biting our nails, and if you attempt to trade it, emotionally exhausted and stressed out. The time to take profits is in the past. Hopefully, you followed my advice last month and did just that, but it is still too early to employ those funds.
The good news is that once this month comes to a close, I expect stocks and the economy to explode in the third and fourth quarters. All we need do is get through this month.
@theMarket: Higher Interest Rates Clobber Stocks
In the grand scheme of things, a small, upward blip in the yield of the U.S. 10-year Treasury bond should be of little concern to equity investors. But sometimes, when the conditions are ripe, even the tiniest spark can cause a conflagration within a speculative stock market.
As readers are aware, interest rates have been trading at historically low levels for some time. The onset of the coronavirus forced our Federal Reserve Bank to pin them even lower. Essentially, it is why the stock market has been having such a great run. Investors have been conditioned to just assume that, if anything, interest rates might trend even lower but not higher. However, during the last few weeks, the yield on the benchmark 10-year U.S. Treasury bond has been moving higher. Since the beginning of the year, it has gained roughly one-half percent. But real interest rates (minus the inflation rate) are still yielding nothing.
In just about every economic recovery, one should expect to see longer-term rates begin to rise somewhat. Economists have been arguing that a moderate rise in this benchmark bond's yield should be good news for the stock market. That may be true, but skittish investors — accustomed to low rates, for longer, and imbued with so much speculative fever — are finding it difficult to accept that concept.
Investors are concerned that all the stimulus that the government has poured into the economy, plus all the trillions of dollars that the Biden Administration is planning in the near future, will spark inflation. That, in turn, could force the Federal Reserve to raise interest rates and tighten monetary policy prematurely.
It doesn't matter that just this week, Federal Reserve Bank Chairman Jerome Powell, in testifying before Congress, once again reiterated that the central bank has no intention of doing that. In fact, he said just the opposite. That calmed down investors for about a day, but it didn't last. Suddenly, the yield shot up to above 1.50 percent on the benchmark bond, and bond traders panicked. It was as if some magic level of interest rates was unearthed that would suddenly put an end to the entire economic recovery. The bears appear to be betting we are at the doorstep of that level.
It is the main reason why technology shares, especially the large-cap favorites, have been taking it on the chin all week. Higher rates are considered the "Achilles Heel" for that group. It is why the NASDAQ has suffered far greater declines than the S&P 500 Index this week. But these large cap companies are now also in so many equity indexes that investors cannot escape them. If stocks like Apple and Google decline, they will (and are) take the whole market down with them.
This week, we have seen the increasing volatility I have been expecting throughout the stock market. We have also seen another uptick in speculation, both to the upside and to the downside. Bitcoin has had some enormous swings, while gold has dropped to six-month lows. The U.S. dollar was first in a free fall and then soared higher. On top of all this, the Reddit/GameStop crew has returned with a vengeance.
For weeks, I have been advising readers to raise cash gradually while the markets climbed to new highs after new high. If you had followed my advice, you should have a nice pile of cash available at this point in the event that markets take a real tumble. That time could be almost upon us.
As I write this, the markets are battling with an important technical level. A sustained move below 3,830-3,840 on the S&P 500 Index would signal to me that a correction is already unfolding. If so, my potential target would be around 3,550. It hasn't happened yet, but it could. In any event, whether it happens now or sometime in March, that correction is coming. Stay tuned.