Bear Case Sounds Smarter, Rarely Correct
Market Update: Bull, not bear. Last week, the S&P 500 rose 2.6% last week to new highs and is now up 5.0% year-to-date. How can that be? Long-term interest rates are rising. The 10-year Treasury yield is slightly lower this morning at 1.62% after extending its year-to-date advance to 70 bps last week. The news services say that is bad, but the data has said otherwise for 12 years. The secular bull market continues. Diversification in equities is working. Large cap value stocks represented by the DIA ETF (Dow Jones 30) made new all-time highs last week while the NASDAQ large cap index represented by the QQQ ETF is still about 5% off its mid-February all-time highs.
Anti-bear: Rising interest rates and stocks
We have covered interest rate rises and their affects on stocks this cycle for many of the past few weeks. 
Last week’s podcast is a worth listening to. Rising overall US Treasury rates have been bullish, not bearish, for the S&P 500 this cycle. 2013? The 10-year Treasury rose 150 bps and the S&P 500 rose? 37% from the November 2012 Obama round #2 election through 2013. 2017? The Trump Presidency first year? The 10-year Treasury rose? 150bps and the S&P500 rose? 37%+ from November 2016 through year end 2017.
“Smart” but wrong bear arguments
Bear arguments about the markets almost always sound smarter. But those bear arguments are rarely correct because the markets lead and follow the economy, and the economy usually grows in a positive fashion. Conventional wisdom, President Biden trades are lagging. Sell old dirty energy stocks? The S&P500 Energy sector is up over 40% year to date. Sell banks and financials on higher regulation? The S&P 500 Financial group is the second-best sector year to date up 18%+. Buy Chinese equities, Biden is soft on trade and China? The FXI ETF peaked around inauguration.
Upcoming Federal Reserve impact
All eyes are on Wednesday and on the Federal Reserve and Chairman Powell’s post-meeting press conference. We expect 2–3 days of short-term volatility ahead of this. We expect no changes to the federal funds target rate, asset purchase program, or forward guidance. However, FOMC members should reveal rate hikes starting a little sooner than before (like in late 2023) and an upgraded economic view. Unlike Europe, higher bond yields are unlikely to prompt the Fed to quicken asset purchases as the U.S. economy is reopening amid receding caseloads. We do expect the Fed to address the current waiver on banks Treasury holdings that is set to expire at the end of the month and causing volatility in the Treasury and collateral markets that is bleeding over some to stocks.
Resources
Some interesting articles:
- Why the stock market’s manic moves over the Fed and inflation may not peak until summer
- Breakout or breakdown? Why the Nasdaq’s two decade leadership cycle may withstand rising rates
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