A Wild Ride

You may have noticed in our recent weekly Market Outlooks, and Mish’s Daily Updates that we continue to expect enhanced volatility. Why? The market has been on a straight upward trajectory since March of last year and some valuations have been getting a bit stretched.

Also, we have an administrative sea change, the economy is starting to open back up and there will be much debate about which parts of the economy need stimulating, creating uncertainty and volatility.

Add to this our view that value stocks are waging a comeback which mean certain market sectors, such as Consumer Staples, Energy and Financials may be the stronger areas of the market. This really showed up last week.

Two factors for that are essentially inherent, rising interest rates and the price of crude oil jumping. Yes, oil’s price took a big jump with the recent deep freeze in Texas, but energy prices had already started a rally (many of you know that we took a position in Oil in Complete ETF which is up significantly already).

Perhaps the biggest surprise in 2021 is the fast rise in interest rates. The 10-year Treasury yield is up 60-80% thus far this year from historically low rates during 2020 in the height of the COVID lockdowns of 0.67% to now nesting at 1.4% (Many of you are aware of how profitable our trade in TLT was last year when we left stocks and moved into bonds).

This recent rise in interest rates is reflective of the economy gaining traction and a more normalized yield curve.  While positive, lower interest rates fueled a refinance and housing boom, kept business borrowing low and helped the economy stay in business during the virus malaise. Rates are still low, but their rapid rise is having a detrimental effect on high growth momentum stocks whose multiples were analyzed in a zero-interest rate environment by savvy young Wall Street analysts.  The market is beginning to adjust to a higher cost of borrowing.

We are still positive on the markets longer term, for the reasons cited above.  Add to this, substantial stimulus /helicopter money is about to be dropped into a more positive buoyant business environment as we enter “herd” immunity this Spring. Consumer confidence, reported this weekend, inched up and shows that the consumer is feeling more bullish on the economy.  Vaccines and COVID-19 remedies should add to this scenario.

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