The Stock Market opened Friday in messy fashion to close out a manic week. March Madness hit the Market. The Bond Market launched a full-court press on the Fed, which turned trading upside down. Interest rates spiked. Tech stocks broke down. Financials soared. Friday saw the opposite. The great rotation continued. There was some wild activity on Wall Street this week. It’s consistent with what’s become accustomed with the Madness of March.
First things first; There’s some really positive stuff going on. The US Economy is expected to grow faster than it has in decades. The Fed upgraded its 2021 GDP growth forecast to 6.5% this week. It hasn’t experienced growth like that since 1984. Unemployment is expected to drop back down to 4%. FedEx reported a stellar Quarter and raised guidance, a good sign for the rest of the year. The company was an integral player in getting vaccines out across the country in fast fashion. FedEx knows logistics. FedEx was the clear Bracket winner Friday.
The biggest news came from the Fed. It pledged to not raise interest rates until 2024 and plans to continue its asset purchase program in which the central bank buys at least $120 Billion of Bonds per month. The Market doesn’t believe it. The Fed controls the overnight rate. But the Market controls the 10-Year and 30-Year rates. Long Bonds sold-off sharply, sending rates higher. The 10-Year Treasury yield hit 1.75%, a level it had not seen since before the pandemic. The 30-Year Yield hit 2.5%, a level not seen since July of ’19. The Bond Market is trying to force the Fed’s hand. The Yield Curve keeps steepening. The spread between 10s and 2s is the widest since 2015. The Market hates uncertainty and often lacks patience.
The Fed’s modus operandi has been time and time again to get inflation higher and now they want to run it hot for a period of time without raising rates. Fed Chair Jerome Powell forecasts inflation to reach 2.4% this year, but called it a temporary surge. He is willing to let the Economy run hot, thinking inflationary pressures will subside. The Bond Market is full of natural skeptics. It is in constant pursuit of truth. The Bond Market is calling the Fed’s bluff. The old adage of don’t fight the Fed is being tested. The Market is pricing in a much higher probability for a rate increase next year. For the first time since the Financial Crisis, over a decade ago, the Bond Market is pushing back. It seems to be winning. Carville was right, the Bond Market can indeed intimidate anyone. It sure did this week.
The Market seems to be questioning the logic of America’s central bank continuing to purchase $120 Billion of securities every month, something it’s been doing since the crisis began a year ago. The Fed made the promise to provide aggressive support back in the Summer, when virus cases were experiencing a resurgence and the country was shutting back down. Today, it’s the opposite. The vaccines have changed everything.
Emergency measures should not be needed as the economic recovery gains momentum. What happens if the Economy grows even faster than the 6.5% rate the Fed estimates? Some on the Street see 8%+. That raises another important question: What happens to the Market if the stimulus goes away? This week was a preview. The Fed caught the Market off guard Friday morning with a surprise announcement. It said it would discontinue its supplemental support to the Banks. This should be considered good news that Banks no longer need multiple backstops. But it’s taking something away. The Market has gotten used to this Fed medicine and has a track record of throwing tantrums when it doesn’t get what it wants. You have to start somewhere.
The Dow reached 33K for the first time ever this week. The S&P reached new highs too. Both closed lower Friday, erasing earlier gains, but that had more to do with the Quad Witch of options expiration. Price action has been very choppy. There have been many corrections below the surface, particularly in Tech. It was needed. It is healthy. The sell-off in Tech has been significant. It comes with the territory. Those are risk assets. So-called safe assets have been hurt too.
Investor focus is primarily on stocks. They’re said to be more exciting. Bonds are more important to the Financial System. The Bond Market has been loud. Long-term Treasury Bond Funds are down 15% this year already. The decline has basically erased a decade’s worth of income! The power of rising rates on long-term Bond prices is real. It will be a wake-up call when unassuming Bond Fund investors get their statements in April. This has been the worst drawdown for Treasury Bonds going back 40 years, categorized as a Bear Market for Bonds. We continue to find much more value in the Boring Blue Chips with safe dividends for income. If yields tick a bit higher, it will get us more interested in putting money back to work in the Bond Market.
The re-opening of America is gaining momentum. There are more cars on the roads. Gyms and Restaurants are opening back up. Travel is increasing. Disneyland plans to re-open its gates on April 30th. It’s been closed for over a year. Large Corporations are not the only ones experiencing a windfall from a broader vaccine rollout and declining COVID caseloads. More than half of U.S. Small Businesses are fully re-opened as many local restrictions were lifted. Will pre-pandemic commercial occupancy rates return? Likely not, at least for a while. A third of businesses surveyed said they would expand digital operations to supplement or replace in-person operations, while only 15% would scale back digital operations to pre-pandemic levels. The hybrid model between in-person and virtual is going to stick for a while, and probably expand. It’s a good step towards some normalcy.
Today is one of the best days of the year in America. It’s tip-off day for March Madness. The College Basketball tournament has officially begun. Millions of Americans across the country are fixated on their brackets. Office pools bring co-workers together. Friends and families playfully compete against each other. You often find yourself rooting for teams you’ve never heard of. Cinderella Stories of little-known schools from nowhere upset the mighty powerhouses, and capture the imagination that anything is possible when you work together. It’s another milestone of proof that we are getting through this. We’re getting through it together.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
