Rising Interest Rates Do Not Reflect Weakening Fundamentals

Interest rates have been climbing over the past months as investors started to weigh in on a sharp economic recovery following the November vaccine news. However, recent economic indicators are pointing to severe weakness in small businesses. Seeking Alpha's Lance Roberts wrote:

If businesses were expecting a massive surge in "pent up" demand, they would be doing several things to prepare for it. Such includes planning to increase capital expenditures to meet expected demand. Unfortunately, those expectations peaked in 2018 and are lower again.

In December, the survey declined to 95.9 from a peak of 108.8. Notably, many suggest the drop was "politically driven" by conservative owned businesses. While there was indeed a drop following the election, the decline continues what started in 2018.

Low-Volatility Has Severely Underperformed The Market

Low-volatility stocks are tied to the interest-rate environment and have thus far drastically underperformed the market since August 2020. While not every low-volatility company should be treated the same way, high-quality stocks that exhibit less fluctuations are always on our radar. From a technical analysis perspective, there are some stocks that present attractive entry points not seen since 2009. We're staying far away from value traps and cyclicals (small caps). The gap between low-volatility stocks and the Russell-2000 hasn't been this big since November 2016. Clearly, the market has gotten ahead of itself by projecting a sharp economic rebound that's only viable through massive fiscal stimulus.

(Own Research)

American Tower Has Flashed A Massive Buy Signal

American Tower boasts outstanding fundamentals, yet, investors have ignored upward AFFO revisions. Technically speaking, the stock is showing positive divergence in the MACD and RSI. From a weekly perspective, shares haven't been this cheap since 2009. We added significantly to our position.

We expect weakness in IWM to benefit low-volatility stocks as interest rates start to fall again. The Russell-2000 is clearly overbought at today's levels and faces a possible 10+ % correction, back to $190. Earnings have collapsed, the average ROCE is mediocre to high-quality low-volatility stocks, yet the dumb money is following the herd.