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Week of March 8, 2021 Thumbnail

Week of March 8, 2021

Greetings,

We hope this update finds you well as we look to daylight saving time and a much awaited Spring.

  • Last week saw continued volatility as the markets struggled to reconcile higher interest rates on longer term maturities with strong growth projections.  We also commented on the possibility of the Fed coming into the market again, as they did in 2012 and buying the ten year treasury and selling the short end--a strategy they called the Twist back then.   Chairmen Powell once again confirmed the Fed's intentions to allow inflation to run beyond their target and not to raise interest rates any time soon.  An increase in the real interest rate is a natural by-product of economic growth, but it is a balancing act, as equity markets try to parse out the give-up on valuation from higher rates vs. the increase in earnings from strong economic growth.  
  • Energy stocks surged almost 10% last week, continuing their run and up nearly 25% year to date.  That sector today represents only about 3% of the S&P 500 Index compared to the 10% weight it held in 2010.  It was double digits back in the early eighties.
  • Buy the rumor, sell the news?  President Biden's American Rescue Plan is very close to securing passage.  Many economists are estimating GDP growth of over 6.5% this year with only $1 trillion of stimulus in the calculation.  There is much debate over the amount and destination of this stimulus.  For example, of the $304 billion allocated to spending on health and education, only $41 billion is scheduled to be spent this year, with the remainder spread out to 2022 and as far out as 2025.  There is much up for debate on whether a more targeted bill directed at those individuals and industries most affected by this pandemic makes more sense, and also on just how much this extra stimulus will increase GDP beyond current projections.  The markets have likely already priced in much of this stimulus package and we would not be at all surprised to see stocks pull back on the passing of the bill, as interest rates continue to search for an equilibrium with so much stimulus in an economy that is already on the mend.

Our full recap of last week's events is linked below.  Please do not hesitate to contact us on any questions or concerns.  We would be happy to schedule a meeting, either virtual  or in our office.

John J Klobusicky, CFA, CAIA, Managing Partner

Market Insights - March 5, 2021

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