Ten-year US Treasury rates spiking to 1.61% last week spooked the major equity benchmarks. The technology-weighted Nasdaq suffering the largest loss, dropping 4.92% for the week, followed by the Russell 2000 losing 2.90%, and the S&P 500 falling 2.45% (it is worth noting that the Technology sector comprises 27% of the index). The TSX declined by 1.89%, and the S&P 400 lost .73%. All benchmarks are in positive territory year to date. Consumer discretionary and technology suffered the worse declines while higher oil prices supported energy. Also, rotation into cyclical shares continued as news on vaccination progress provided optimism about reopening the economy. Value stocks outperformed growth for the week and year to date. The value style of investing is outstripping growth year to date by almost 5%, but the one-year growth style is up over 37% while the value is only up 1.4%.
With the prospects of the economy reopening and growth accelerating on pent-up consumer demand later in the year, it is not surprising bond rates finally increased. The Treasury auction earlier in the week was tepid at best. In comments before Congress, Federal Reserve Chairman Powell once again confirmed their accommodative policy stance. He went on and said , “The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.” 1 As the economy opens, pent-up consumer demand is expected to cause inflation to spike. In past statements, the Fed has indicated that the pent-up consumer demand resulted from COVID lockdowns will be short-lived and transitory before returning to acceptable levels. As rates move higher, the likely impact will be for the equity risk premium to compress, increasing equity volatility. Many analysts are expecting improving growth rates as the year progresses with the reopening of the economy. Should reopening and growth optimism be well-founded, earnings growth should be supportive of equity valuations.
In economic news, the UMich sentiment survey for February was released last Friday. The expectation was for a rise from the disappointing January drop. The final number came in at 76.8, beating the expectation of 76.5, still well below the January posting of 79.0. Some of the sub-measures may be a better reading on consumer sentiment. The gauge of current conditions fell to 86.2 from 86.7 in January. The measure of expectations also dropped in February to 70.7 from January’s 74. As the vaccination rollout continues, infection rates decline, and death rates decrease, indications are consumers are not optimistic for a return to normal economic growth.2
Pending homes sales nosed-dived in January by 2.8% month-over-month to the lowest level since July. Rising mortgage rates regaining September levels drive home applications (not counting refis) to nine-month lows hitting the West, Northeast, and Midwest regions most severely. In the South, pending home sales rose to the highest level since August.3
Initial jobless claims released by the Labor Department on Thursday showed promise, with first-time claimants diving to 730,000, beating consensus of 825,000. The decline is accounted for by an unprecedented drop in claims from California and Ohio. Unfortunately, the report’s bad news was the number of Americans on government unemployment benefits breached the 19-million-mark.4
US Durable goods for big-ticket items lasting more than three years increased by 3.4% in January on a jump for civilian aircraft. Ex aircraft, durable goods were up 1.4%, which is still quite reasonable. The expectation was for a little over 1% after November and December increases of 1.2% and 1.3%, respectively. January’s increase extended the positive months to nine since the beginning of the pandemic and is considered a sign that manufacturing has proven resilient in the face of economic lockdowns.5
The recent volatility in the equity markets is anticipated and is likely to continue throughout the year. At Sightline, we have both equity and fixed income strategies designed to reduce volatility in turbulent markets.
Sources
1 https://www.cnbc.com/2021/02/24/us-bonds-treasury-yields-fall-ahead-of-powells-second-testimony.html
2 http://www.sca.isr.umich.edu/
4 https://www.dol.gov/ui/data.pdf
5 http://www.therepublic.com/2021/02/25/us-durable-goods/
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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