Things will look a lot better than last year, but that is a pretty low bar to clear. And a lot of people seem to be forgetting that the economy wasn’t exactly ripping before the virus came along. Real GDP growth in 2019 was just 2.2% and the average yearly change in real GDP was just 2.3% from 2010 to 2019. That’s okay, but it isn’t a boom.

Considering that we just added a boatload of debt to that already slow-growing economy, I’d expect post-virus growth to actually be lower than before. But who knows? Maybe the key to economic growth really is as simple as the government writing checks. We seem determined to find out.

Bond yields peaked at the beginning of April and have fallen slowly but steadily since. The drop, however, isn’t sufficient to change the uptrend in rates that started last August. In fact, from a technical perspective, the 10-year yield could fall all the way back to the 1.2 to 1.3% range and still not break the obvious uptrend line – not that I’m saying that will happen:

But falling rates – and it isn’t just the nominal 10-year, TIPS yields have declined, too – are not consistent with the boom narrative that dominates most other markets – especially stocks – today. Neither, by the way, is the recent action in the dollar which looks a lot like the action in bond yields since the beginning of April:

The longer-term picture for the dollar remains range-bound as it has since 2015. The dollar index has basically traded between 90 and 100, with two outlier moves to 103 and two minor forays below 90. Recent action puts it near the bottom of that range:

Current economic data is certainly strong – although not universally so – but the bond and currency markets may be pointing to some weakness ahead. It should be noted that the dollar moves are generally about relative growth and what may be going on here is a shift in the perception of growth abroad. The Chinese Yuan has recently strengthened some and other EM currencies also seem poised to move higher.

The Aussie and Canadian dollars are still in uptrends while the pound and Euro are also acting well. The economic stats out of Europe recently have been better, too. There are some virus hotspots that are not performing well, with India being the obvious one and Japan maybe being a bit surprising.

The rest of the world has lagged behind the US in vaccinations, but with the US well on the way to getting everyone a shot, it may be that the markets are starting to anticipate the rest of the world catching up. If the boom here has been fully anticipated, maybe it hasn’t been priced in yet outside the US -emphasis on maybe.

In any case, the current environment remains one of improving growth and a neutral dollar. I am not willing to call the dollar in a long-term downtrend yet and probably won’t unless it breaks the bottom of that range it’s been in for six years.

And calling a short-term uptrend will require more than that feeble bounce that died at the beginning of April. I also don’t see any extreme positioning in currency futures that would warrant a change in stance. Overall, positioning looks pretty neutral to me.

There are other markets which are pointing to the potential for a renewed uptrend in rates and further gains in economic activity. The copper to gold ratio which peaked in early March, leading bond yields by a full month, has recently resumed its uptrend. Momentum which had waned during the sideways correction has also recently turned higher. If this uptrend continues, rates will almost certainly do so as well.

The commodity indexes have also resumed their uptrend, with non-energy commodities taking the lead.

It is important to remember though that this was a supply shock type recession. As the economy re-opens, demand will naturally rebound quicker than supply, raising prices. That is especially true of commodities which often come from emerging markets where the virus is still far from under control. The price hikes we see in commodities may well be transitory.

What we look for when managing portfolios is confirmation across markets. As I said last week, this happens when a consensus emerges about the future direction of the economy. That’s what is missing today, where we have some markets telling us one thing and others telling us the opposite. I don’t know which markets will prove correct and it is generally not a good idea to base portfolio changes on guesses, so for now I’m not making any big changes.

That doesn’t mean I’m completely comfortable with the state of markets today. Speculation is, in my mind, out of hand in a number of markets. Cryptocurrency markets – I hesitate to even call them markets, but that’s a conversation for another day – are just frankly nuts in my opinion. People appear to have lost their minds and I suspect there will be a lot of regret in the future about caution being thrown to the wind today.

I have speculated plenty in my career, but I have always adhered to a bit of advice I was given by an old commodity trader back when I first started doing this professionally. Never, he said, never, ever risk the milk money. That was his playful way of saying that you don’t risk important capital on speculations. I can’t think of anything that violates that rule more than refinancing your house and putting the proceeds into an asset that has essentially no value.

The economic data released last week was generally positive. The Chicago Fed National Activity Index rebounded to 1.7, more than fully negating last month’s -1.2. The three-month average is now 0.54, showing the US economy growing slightly above trend. The other report of note was new home sales, which rebounded to over 1 million units annualized.

Sales are up nearly 67% from last year and inventory is non-existent in new or existing homes, prices acting as one might expect in that situation. The housing market is hot right now and it appears it will stay that way a bit longer. There are real fundamentals driving the housing market, but eventually things will balance out and cool off. When? I have no idea, but I wouldn’t be in a hurry if I was a first time home buyer.

Next week brings some important reports, including Durable Goods orders, Q1 GDP, and Personal income and consumption. All are expected to show healthy gains. The most interesting report next week may be the wholesale inventory report, one that most people ignore. The inventory/sales ratio ticked up slightly last month and it will be interesting to see if that continues.

The S&P 500 fell slightly last week while most other markets showed gains. Small-caps were higher, but haven’t made any real progress since early February. Still, the downside during that consolidation period was very minor and momentum looks ready to turn positive again. The best performing assets of the week were commodities and real estate, both of which have been strong recently.

Real estate in particular is interesting, and I think it has more to go in relative performance versus the S&P 500. REITs have underperformed over the last year, but are surging this year, now ahead of small caps YTD. International stocks were mixed, but China was a notable exception and appears to be starting a recovery after a 19% correction that started in February. There wasn’t much performance difference between styles last week.

From a sector perspective, as I said above, Real estate was the leader. Healthcare also had a pretty good week, while energy lagged again as it has over the last month.

It may be that the recent pullback in bond yields is just a hiccup and that the expected boom materializes on schedule. I actually don’t expect bond yields to fall significantly from here – there is nothing that indicates we are headed back into recession – but we have added some duration to our bond portfolios over the last couple of months.

It wasn’t a big change – as I said above there is nothing that indicates a big change is justified right now – but it seemed a logical one with bonds very oversold. Call it a slight hedge since our bond positioning has been very short-term since last summer. I also recently restored balance to our commodity positioning, which had been overweight general commodities versus gold.

And I also recently sold some satellite sector positions as my uncertainty level, like everyone’s, has increased recently. When that happens, I tend to shrink the portfolio and stick to broader themes. I also recently took some profits out of our small-cap position, but we still retain a significant (for us) weighting.

A lot of those moves were based on what I see as a very speculative market that has priced in some very good things in coming months. Whether I continue to reduce risk will depend largely on economic developments and how the markets react to them. If the dollar continues to fall, it may mean shifting the portfolio to weak dollar beneficiaries, but frankly there isn’t much on my cheap assets list right now.

International markets are cheaper than the US, but that doesn’t mean they are cheap. I recently reviewed a group of international value funds and found only one with an average P/E less than 15. Most of them held stocks with an average P/E in the high teens to low twenties. And these were value funds.

I don’t know what other people will do with their new-found vaccine freedom, but the idea that the fiscal follies of the previous and current administrations have created the conditions for a sustained boom seems unlikely to me. If anything, I would expect people to act more conservatively with their money after this is all over. More than anything, the virus revealed for many the fragility of their economic situation.

And of course, we’ve probably seen the last of the checks from Uncle Sam for a while. Congress is about to go back to its old ways of doling out checks to the folks who really matter to them – the ones that fund their campaigns.