We are in March. The year is advancing on us and we just experienced some rather strange market behaviour. Having enjoyed in January and much of February a powerful continuation of the 2020 equity rally, the yield curve suddenly steepened! Long dated US bond prices fell and yields rose (whilst remaining very low in absolute terms!). Short rates remained unchanged, anchored in J. Powell’s promise of an anchor at or about zero. Finance 101 teaches us that a steepening yield curve suggests a strengthening economy and usually is a harbinger of equity prices rising, especially when the movement is in the long end of the curve and not driven by short end fluctuations. Is the bond market being rattled with the sudden apprehension of an imminent resurgence of inflation?
It felt good to observe this curve movement, even if driven by inflationary fears, as some inflation (as targeted by central banks) is good for equities. We felt (re)vindicated (yes we know it’s not a word but it feels like it should be!) with our bullish equity outlook only strengthening our conviction for a strong equity market for 2021.
But the equity markets didn’t follow textbooks nor our convictions! They tumbled into the close of February hard and fast. The tech-heavy NASDAQ falling more than others.
The Dow Jones closed February back within a few points from its December close, the NASDAQ a couple of points below, only the S&P 500 eked-out a small gain. Basically, flat year to-date.
Looking into the remainder of 2021 - Well, we have a third COVID19 vaccine from J&J. So we have three recognised and approved “Western” potions available and the “others” from Sputnik 5 from Russia and one from China. We may well be on the road to recovery. Biden has succeeded to get the House to sign-off his $1.9 trillion package, the Ten-Year US Treasury Note yield has fallen back from its 1.60% spike to a more palatable 1.40%. Earnings’ season is about over with largely better than expected results. We also got Joe Biden in the White House. Simple algebra would suggest that the indices ought to have gained some ground. Can we paraphrase Mae West who once said, “too much of something good is wonderful...” and shade of the imminent future in rosy coloured? Benjamin Disraeli did tell us “The secret of success is to be ready when your opportunity comes...” to us, it feels that it may indeed be just about now ☺️
Other bits of noise we heard and were not distracted by were the huge rise in Bitcoin through $50’000 on the back of perceived validation by Elon Musk. We still can’t see where and what value there may be in the coin. The market clobbered Tesla stock on this...
Oil on the other hand has been gracefully climbing to $62 up strongly from the $50 level at year-end. Other essential commodities such as copper have seen strong demand and price rises.
In short, we remain unconcerned about inflation which we believe will remain below central bank targets, we believe that the recent spike in longer yields will calm-down and settle under 1.50% for the ten Year Treasury. Steady defines the outlook. The US Dollar is edging upwards slowly, with DXY over 91; up some 2% year to date, we see it likely to pursue this trend if slower than we may like.
We will add a thought here and suggest investors read between the lines of the Biden Administration’s proclamations - They will re-join the Paris Accord. They stopped the Keystone pipeline, they don’t like fracking, they want to go green. And they plan large fiscal projects! We think that the hydrogen sector will benefit... Do consider the Fuel Cell makers such as Plug Power, Ballard Power, Bloom Energy and Linde PLC. At the same time, the old guard of classic energy, i.e., oil is likely to rise into an awakening economy. The general reset away from hydrocarbons is happening, but it will be a long road along which many diesel trucks will be rolling... Whilst we maintain our view that bonds of all types are unattractive at this time, we do not fear a big change in levels anytime soon. We remain steadfast in our belief that there are no inflationary pressures in the system adding to our conviction that bonds will not collapse anytime soon.