When the Fed says yes, but investors say no?
What you need to know in 5 minutes - Mar 22, 2021
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What the Market?
Mr. Market is feeling some angst and confusion. Economic data and institutions are showing strength and promise for the future, but investors and bond yield don’t appear to be as optimistic. Are bond markets jumping the gun, or is the economic data just wishful thinking? Mr. Market doesn’t quite know what’s going on, and as a result he’s sending mixed signals. Neighbors say they saw him out for a walk singing what do you mean?
A cautious thumbs up from the Fed: For the first time since the pandemic struck the Federal Reserve recognized that the economy is (slowly, but surely) improving. The Fed is in a delicate position as it wants to project rational optimism confirming the economy is indeed recovering, while at the same time maintaining lenient monetary policy measures in a low interest rate environment. As the economy reopens and COVID dissipates, it is only a matter of time until Powell has to start dismantling the Fed’s lax policies; potentially starting with dialing back its aggressive asset buying program.
Bond yields continue climbing: The 10Y treasury hit its highest point in over a year at 1.75% last week. The Fed made it clear that it is still too early to worry about interest rates and inflation and confirmed they will not be raising rates for the time being. These climbing yields have an impact on the economy, as mortgage refinancing demand has dropped drastically over the past couple of months.
What’s an investor to do?
Hold steady! The market is finding its new groove as the recovery gets underway. After a long year of fear and pain, the world’s real economy is ready to go back to growth mode. Value is once again leading growth expectations, cyclicals are leading defensive stocks, and small caps are beating blue-chips. As vaccines roll out globally and the world gets back to how it used to be (kind of), financial markets will once again focus on actual value generation rather than the expected future benefits of what is to come once the economy is back on track.
Expect markets to remain somewhat stable for the next couple of weeks as we approach the first earnings season of the year. Take advantage of any dips to double-down on your trusted positions and reallocate your portfolio to the changing environment. Growth and tech stocks continue to struggle as yields continue rising – the pullback doesn’t appear to be over.
There is still time to build positions in cyclicals, small caps, and value plays.
Keep an eye on the economy
Personal Consumption Expenditure (PCE) data: The Federal Reserve’s favorite barometer for inflation will be released this Friday. Analysts expect PCE to rise 0.3%, while core PCE (excluding food and energy) to rise only 0.1% (Year over year of just 1.5%). The Fed expects a core PCE of 2.2%, meaning inflation is expected to push above 2% for an extended period of time.
The Curious Investor:
Fund managers fear inflation more than COVID: For the first time since the pandemic struck, investors seem to be getting over COVID and are now considering inflation the biggest risk ahead, with “taper tantrums” as a close second. Global vaccine rollout issues have been relegated to third place according to Bank of America’s fund manager survey. Although it may not be something to expect in the immediate term, consider broad-based exposure to value plays and commodities: GCC, VDE, CWS, VFH, JJM
What happened with Visa? (Disclosure: WTM is long Visa): The DoJ launched a new investigation to determine if Visa is engaging in anti-competitive practices regarding its debit business. Visa stock dropped over 6% on the news just as the optimistic economic data began to push the stock up. If the probe finds Visa guilty of engaging in anti-competitive practices they will likely face a substantial penalty and have to adjust their network fees. That being said, Visa has enough cash on hand to be able to brush off a reasonable penalty and will continue to benefit from the reopening of the global economy. It may not be a bad time to double-down on the market leader.
No notable earnings this week
Monday: Chinese Central Bank interest rate decision, Fed Chair and member speeches, U.S. National Activity Index
Tuesday: U.K. unemployment figures, Bank of Japan Policy minutes, Fed Chairman prepared remarks for Congress, Bank of England Governor speech, U.S. New Home Sales
Wednesday: U.K. CPI, Eurozone, U.S. and U.K. PMI, U.S. Durable goods orders, Eurozone consumer confidence
Thursday: Eurozone Economic bulletin and Council meeting, Japanese CPI, U.S. Jobless claims, Personal consumption figures and Q4 GDP revision
Friday: U.K. Retail sales, U.S. consumer sentiment and personal spending figures
If you didn’t know, now you know
Covid-19 units in all but two of Brazil’s 27 states are at or above 80% capacity. The total death toll in Brazil is approaching 300,000 as the nation records its highest daily death toll yet (2,841 within 24 hours). The opposition is calling for a lockdown and a serious approach to handling the pandemic which Brazil’s president, Bolsonaro, has consistently played down. Just last week, he told the people to “stop whining” about the pandemic. We’ve seen this approach play out somewhere else before...
This summary only covers the surface of the issue. To read more, click here.
What we’re vibing:
Gregory Porter performing Probably Me: If you haven’t heard the soul of Gregory Porter, this performance at the 2017 Polar Music Prize Ceremony is a great place to start – it made Sting cry and gave us the chills.
Tasha Sultana’s Tiny Desk Concert by NPR. One of the most emotionally charged tiny desk concerts we have witnessed to date. A brilliant performance from the multi-instrumentalist Aussie singer. For those unfamiliar with Sultana’s alternative/psychedelic rock, take a few minutes to enjoy the vibrant energy from her music and performance.
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