Stimulus spending is the theme that continues to defeat every other piece of news. Neither surging virus cases nor political tumult can diminish the allure of trillions in more federal spending. It’s a testament to the bull market, and propelled equities to all-time highs last week. What disrupts that calculus going forward? Two things in our view (outside of geopolitics, inherently unpredictable, although certainly an increasing risk lately):
- A Fed policy mistake – Interest rates are rocketing higher on stimulus optimism, and market-based inflation expectations are fast approaching the highest level in 3 years. The word “taper” is starting to make the rounds as Fed officials talk about slowing the pace of bond purchases. This is a delicate balancing act for the Fed, and it got it wrong twice before: in the “taper tantrum” of 2013 and with Powell’s careless comments around the balance sheet in late 2018. Both events were followed by market selloffs.
- Ineffective vaccines – The Covid situation is spiraling out of control across the U.S., but to the market, this is a temporary hit to growth and there is light ahead. A strain that can skirt the existing vaccine technology, sending scientists back to the drawing board, changes that dynamic.
Notice what didn’t make that list: impeachment; 25th amendment; unrest across the country; Covid-related restrictions. Even last week’s job report, showing the first monthly net loss of jobs since April, did not impact the bullish sentiment.
One only needs to tune into CNBC for a few minutes to hear about the retail darlings driving sentiment: Tesla and Bitcoin. The buy-the-dip mentality is incredibly strong, so much so that Wednesday’s session – despite the unrest in the nation’s capital – saw the fourth highest volume of call options traded on record. Stimulus checks, if they arrive again, add fuel to that fire, and only the new, welcome distractions of getting life back-to-normal cools down this phenomenon.
So much for boring old fixed income! Stimulus optimism is sending interest rates rocketing higher. The 5-year, 30-year yield curve closed Friday at 139 basis points, above the highs seen after President Trump’s 2016 election when tax reform and infrastructure optimism propelled higher yields. Strategists are scrambling to increase their yield forecasts. We agree the technical breaks of this past week are meaningful, and that stimulus spending will increase growth in 2021, pushing up yields at the margin.
Despite near-term optimism, we are still in a low growth world with disinflationary tendencies. Throw in the Fed’s new interest rate framework and their past experiences with balance sheet management, and we think policy remains easy for years. That is great for asset prices, but don’t bet the farm on a huge spike in yields.
What to Watch This Week
- Politics – Markets are looking past the turmoil in D.C. to happier days of a free spending Democratic government. But Senator Joe Manchin indicated Friday that he does not support $2,000 checks. Thursday may be important as President-elect Biden outlines his agenda. Pay attention to how this comes together, though the impact will be greater for the recent trends (value over growth, small over large) than for the market’s overall direction.
- U.S. CPI on Wednesday – This is the first meaningful inflation print in a long time. December’s jobs report showed an acceleration in wage gains, and although this was driven mostly by lower paying employees (leisure and hospitality) falling off the rolls due to the Covid surge, the inflation narrative is running hot among market players. An above-consensus inflation print could cause the recent rise in rates to go from a good thing to a bad thing for markets.
- Fedspeak – This has been confusing, with Atlanta Fed Bank President Raphael Bostic, a voting member, leading the charge on tapering. Does he clarify his prior comments this week? And will Chairman Jerome Powell hint that upside risks to growth may bring forward policy normalization on Thursday? Watch the dollar, finding its footing last week after sliding for seven straight months, as an early indicator of risk to the goldilocks equity narrative.
Bond Market Bears Growling as 10-Year Yield Breaks Through Important 1% Level
Horizon Investments’ Top Themes for the New Year
PIIGS Fly and Other Stories of Investors Reaching for Risky Bets
Momentum’s No Longer the Stock Market King, Vaccine Will Raise New Leadership
It’s Getting Harder to Fund Retirement Using Bonds
7.9 Trillion Reasons Not to Fight the Fed, ECB, BOJ or BOE
How Can You Reduce Longevity Risk for Retirement Investors?
This commentary is written by Horizon Investments’ asset management team. Please reach out to Chief Investment Officer Scott Ladner for interviews at 704.919.3602 or email@example.com.
To download a copy of this commentary and the chart of the week, click the button below.
To discuss how we can empower you please contact us at 866.371.2399 ext. 202 or firstname.lastname@example.org.
Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This report does not attempt to examine all the facts and circumstances that may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Horizon Investments, LLC (“Horizon”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security in question is suitable for their particular circumstances and, if necessary, seek professional advice. Investors may realize losses on any investments. It is not possible to invest directly in an index.
Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed herein are our opinions as of the date of this document. We do not intend to and will not endeavor to update the information discussed in this document. No part of this document may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without Horizon’s prior written consent.
Other disclosure information is available at www.horizoninvestments.com.
Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC
©2021 Horizon Investments LLC