Bonds in Red; Economy Gaining

Market Update: Equities pullback, but economic recovery should gain speed. Global equities were down across the board last week with the NASDAQ (-4.9%) leading the way. Most sectors were in the red with the biggest losses in health care (-8.2%) and tech (-8.1%). Gains in banks (+1.5%) and consumer discretionary (+0.6%) helped limit the overall damage.  Peak to trough, the S&P 500 had pulled back 3.5% at the end of February.

Bonds, in the red

Bond prices were crushed globally last week with the market talk being a concern over rising inflation, while the data behind the scenes is saying that inflation worries peaked 2 weeks ago.  Bond markets calmed down around mid-day Friday.

In our view, the selloff in Treasury yields reflects the improving outlook — not inflation — with better corporate earnings, the positive economic surprises, and the next stimulus package on track to pass Congress this month. Real growth and the recovery should gain speed in the coming months as inflation worries peak. Last week, short-term investors believed that the economy could even overheat in the second half of the year and caused short-term collateral damage in the bond markets.

Equities, not in the red

U.S. equity futures are up this morning by about 1.0%–1.2%, with global markets higher across the board. Treasury yields are mixed along the curve, down around 1.9 bps on the 5-year but up around 5.1 bps at the long end. The US dollar is little changed.

Interest rates, red and green volatility

Please tune into our recent Friday, February 26 podcast entitled “Collateral Damage, Time to Buy,”  to hear more of our thoughts on recent market circumstances.

Here is an excerpt from the discussion:

Interest rate volatility (convexity hedging) created forced bond market de-levering and a late February sell-off (-3.5% ). Our view is that Real Growth is an area that investors and market watchers should be paying attention. The 6th stimulus plan starts hitting in 2-3 weeks. The S&P 500 rose almost 900 points since the second half of 2020 as the 10-year Treasury rate rose almost 100bps. That seems to indicate that higher trending interest rates are good stocks, at least for now. This is a very normal bull market. As for gold? Our view is that it does not work as effectively as an inflation hedge, and that generally speaking, it is better to consider equities or real estate that can see their prices rise as the economy expands.

Resources

• Find more information and help on our YouTube Channel.
• Check out these helpful podcasts by Chris Perras, CFA®, here.

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