Drive Carefully
Doug Walters
Bonds are currently in the driver’s seat, but the Fed is at the ready to step on the brakes when needed. But you can choose your vehicle, so choose wisely!
Contributed by Doug Walters , Max Berkovich , ,
Stocks and bonds took investors for a wild ride this week, with bonds appearing to be in the driver’s seat. Investors are continuing to weigh the consequences of the ensuing post-pandemic economic recovery, with the potential for the Federal Reserve to reduce its asset purchases (tapering). Sitting in the passenger seat is Fed Chairman Jerome Powell. Like our driver’s education teacher, he is watching every economic turn with his foot hovering over the brake.
Expectations were that the 10-year treasury yield might finish the year slightly above 1.5%. Thanks to price action this week, that milestone has already been reached. What is driving the sharp rise in yields? In a way, it is a taper tantrum without the taper. Recall back in 2013, coming out of the Financial Crisis, then-Fed Chair Bernanke stated the Fed would slow down its asset purchases (which stimulate the economy by keeping interest rates low). The result was a spike in yields. While current Chair Powell has been consistent in stating that he has no plans to slow down asset purchases, there is a rising concern that a strong post-pandemic economic recovery will force his hand (or his foot). We saw those fears play out this week, and stocks reacted by shedding some of their recent gains.
So, how should investors think about the current environment? Continuing our analogy, you cannot avoid having the Fed in your passenger seat, but you can control which car you get into. When I took driver’s ed many years ago, the shop class students maintained the car we used. The steering wheel had so much play in it you could not keep it going straight on the road, and it shook violently over 45 mph. As an investor, that is not a car I would choose to get into. I would equate the gamble of stepping foot into that car with the speculative investing we see today in retail squeeze stocks (i.e., GameStop), cryptocurrencies, SPACs, and NFT art (don’t ask).
Evidence-based investors do not worry about what they cannot control, like Jerome Powell in the passenger seat. Instead, they keep their eyes on the road, within a vehicle built on science, not speculation, and tuned to their unique risk tolerance. They do this knowing it gives them the best chance to reach their desired destination. Enjoy the journey!
10 Year Treasuries topped 1.5% this week for the first time since the pandemic began.
Headlines This Week
Higher Rates
Fed officials view rising bond yields as a positive sign for economic outlook as the 10-year Treasury rose from 1% yield to over 1.5% in just a month.
- The 10-year U.S. Treasury is now yielding more than the S&P 500 for the first time since the beginning of last year. As bond yields rise, they become more attractive and pressure stocks, particularly those with expansive valuations.
- Central Banks around the world stress the need to keep rates low to stabilize and protect their economies.
Stimulus
Lawmakers are set to pass the latest fiscal stimulus bill in the House, turning the bill over to the Senate.
- The Senate is expected to strip out the provision to increase the federal minimum wage.
- Lawmakers hope to deliver the bill to President Biden before March 14th.
Economy Pulse
Consumer confidence remains steady, while initial unemployment claims have declined.
- Rising wages could also help the economic recovery. According to Bloomberg, companies are increasingly confident in their ability to raise prices to offset higher input costs.
- Positive economic themes from the leading 20 nations (G20) help support a global recovery and may boost the International Monetary Fund’s (IMF) resources to help poorer countries.
The Week Ahead
To the Senate
After the House’s passing of the $1.9 trillion Covid-19 stimulus package on Saturday morning, the bill will now go to the Senate, where the debate will begin next week.
- The vote in both the House and Senate is expected to fall along party lines.
- Democrats argue that the amount is necessary, while Republicans are pushing for a smaller bill that avoids a potential spike in inflation that could derail the economic recovery.
- If passed, each eligible American would receive a $1,400 direct payment.
- Other measures include extensions of jobless benefits through August 29th, $20 billion for a national Covid-19 vaccination program, and $170 billion to K-12 schools and higher education institutions to cover reopening costs.
Got Oil?
The Organization of the Petroleum Exporting Countries Plus (OPEC+) will be meeting next Thursday to discuss the possibility of raising its oil production levels.
- The group is currently suppressing oil production by more than 7 million barrels per day. However, with the price of oil on the rise, OPEC+ is considering raising output by as much as half a million barrels per day.
- The fate of Saudi Arabia’s voluntarily cut of an additional 1 million barrels per day for the months of February and March will be on the table at the meeting.
- Russia has been pushing for an increase in production as the country looks to increase its petroleum revenues, while the Saudis have been urging fellow members to be “extremely cautious” in increasing output.
Optimistic Employment
Two large employment indicators, non-farm payrolls and ADP employment change, will be released next week.
- After a somewhat disappointing January in which the US economy added just 49k jobs, forecasts for February are at a more optimistic 148k rise in nonfarm payrolls.
- The payroll firm ADP will be releasing their employment change numbers for February on Wednesday, with a forecasted increase of 168k jobs added.
- Investors will also be anticipating the release of the Fed’s Beige Book with details about each district’s performance.
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