Something strange has been happening in the Market. The Bond Vigilantes have returned after a 4-decade hibernation. The term “Bond Vigilantes” was coined by legendary investor Ed Yardeni in the 1980s in reference to Bond traders that protested Fed policies and aggressively sold Treasuries to drive up yields, essentially forcing the Fed’s hand. They’re back. And they seem to be holding the Market hostage.
For the last few weeks, stocks have largely moved in response to the Treasury Market. When Treasury Bond yields jumped, the fastest-growing stocks, primarily in Tech, sold-off sharply. A correction was more than needed in areas of Tech as the year began. But this has been a bit of a Tech wreck in some areas. It is certainly not reflected in the Dow. Cyclicals, like Financials, Industrials and Energy have done well. These are among the Value stocks.
This week there was little reprieve, unlike the past few, where the whipsaw price action saw fast rotation between Value and Growth. Even as interest rates fell, Tech was still under pressure. There seems to still be some concerns about the Fed hiking rates as early as next year, despite the Fed Chair digging his heels in with a strong no. The Bond Market doesn’t believe him. Inflationary pressures are growing. They’ve been evident in food prices. It’s broadening. The Stock Market is feeling it. Despite the sell-off, there are still some frothy valuations and higher rates always put pressure on unprofitable companies with future growth expectations.
There’s something else going on that is causing crosscurrents around the globe. Supply chain disruptions were already an issue due to pandemic factors. At first, it came in the form of PPE, later followed by pent-up demand for consumer goods in the economic recovery and a growing semiconductor shortage. Difficulties in securing raw materials and other inputs have worsened. The Biden administration has set a mandatory 100-day review of critical product supply chains in the US. The executive action is broadly focused, from semiconductors and key raw materials, to essential pharmaceutical ingredients.
Supply chains have been strained everywhere by the Covid pandemic. It’s been difficult for global suppliers to get their hands on cheap shipping rates. It just got worse with a cargo clog in the Suez Canal, in Egypt. It’s the fastest route from Asia to Europe. There are over 300 cargo ships backed up right now. On these ships are a vast array of items ranging from cars to coffee. Roughly 12% of global trade and a third of the world’s shipping container volume move through the Suez Canal. It is one of the world’s most important waterways.
If the situation in the Suez continues for an extended period, shipping rates will spike. Oil prices already have. Inflationary pressures are growing. That’s what the Bond Vigilantes are saying. And the Fed says it is just fine with it. The Fed has tools to deal with inflation and believes it’s only temporary. Besides, even with the recent rise, interest rates are still extremely low from a historic perspective. The average interest rate on a 10-year Treasury dating back to 2000 is 3.48%; the 10-year is at 1.66% today. The price of money is not choking off investment and growth. At least not now.
Multinational Corporations are starting to worry about bigger disruptions to their supply chains. Imported goods from Asia to Europe are delayed. If the Suez blockage is not cleared within the next few days, some shipping firms will be forced to re-route vessels around the southern tip of Africa, which would add roughly a week to the journey. A rough estimate by Lloyds of London calculates the blockage is costing about $400 Million an hour. An hour!
Back at home, there’s the issue of re-opening America. The process is inherently inflationary. Keep in mind, prices have increased from very depressed levels early in 2020. Lumber prices doubled as new constructions and remodels soared during Covid. Copper prices jumped too. People left the Big City for more space. That is, those that could work from anywhere.
Will the re-opening bring people back to the office? Not immediately. Some companies, like Cisco and Facebook, have said their mandatory work from home policies will remain in effect until June. Apple said that too. Microsoft plans to have employees come back in July. Google is still scheduled for employees to return to campus in September. Companies like Adobe, PayPal and Twitter have no plans to require employees to return to the office. There is no consistent path for Corporate America. Perhaps that inconsistency weighs on the Market too.
Small Businesses tied to Corporate America, like dry cleaners and sandwich shops, might never recover to their pre-Covid world. There are thousands of them around the country, and they’re still hurting mightily.
A hybrid model, with some sort of combination of in-office and remote work, seems like a certainty for the foreseeable future for many companies. Employers are weighing 2 important forces: The need for in-person creativity and culture, while providing the flexibility and efficiency in working from home. It’s certainly on our minds for our firm.
Interestingly enough, employees in America seem to be thinking the same. A recent survey by Slack showed 20% of the responders wanted to work exclusively remotely. Nearly the same wanted to come back to the office, while over 60% chose a mix of the two. That’s the hybrid model.
As the re-opening of America continues, the return to normal gets bumpier. What is normal anyway? It’s cliche to say it’s going to be a new normal. But it’s accurate. A lot of the positive expectations have been priced in. A correction was inevitable and necessary. It’s a process. The Market is doing what it does. Interest rates couldn’t stay near-zero forever. We have been buying the weakness. The choppy price action should continue into month’s end. Hang on tight. There’s a rapscallion rhapsody that can be heard in the Market. Investors be warned. The Bond Vigilantes ride again.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
