Equity markets lacked direction this week, as the ongoing shift to higher yields offset optimism on the economic front and encouraging words from the Fed. Vaccines are rolling out on pace to hopefully reach herd immunity sooner than anticipated, and have life return to some sense of normalcy. The Fed this week reiterated it’s position on rates and inflation, suggesting that no rate hikes would be seen for the foreseeable future, as they allow the economy to run hot and expect the upcoming inflation spike to be short-lived. On the economic front, manufacturing indices around the country are showing signs of a robust acceleration, as orders climb and hiring is picking up. Meanwhile, consumers flush with cash will put pressure on retailers in short order, as a confident public is set to splurge on “revenge spending” from pent up demand, with expectations for the strongest consumer spending in many decades ahead.
All eyes were on the Federal Reserve and bond yields this week, as the central bank assessed the state of the economy and laid out their intentions for the coming quarters and years ahead. The Fed continues to remain on hold with expectations for raising interest rates, as the significant scarring seen from the pandemic will take some time to heal. Unemployment levels are still almost double what they were leading into the crisis, and those figures do not take into account the millions of workers who have left the workforce altogether. The Fed is intent on supporting the labor economy and bringing back those workers from the sidelines, leading Chair Powell to state that the Fed is “not even thinking about thinking about raising rates.” The Fed now finds itself in the difficult position of acknowledging the brighter outlook from a strong rebound and continuing to insist that policy stay loose. One of their guidance measures released Wednesday, the dot plot, showed rates were expected to rise modestly through 2023, with much to be accomplished before the Fed begins tightening policy. More importantly, the Fed has expressed their willingness to let inflation climb above their 2% target for some time to offset years of lower inflation. It does appear that at this time, any potential for the central bank to increase their bond purchases or attempt to suppress longer-term rates as they did in “Operation Twist” in the previous cycle, is looking very unlikely. Yield curve control, whereby they engage in manipulating bond markets to support financial conditions, also appears off the table for now.
We continue to remain pro-risk across portfolios, but expect significant volatility ahead as markets digest record amounts of stimulus, bond yield swings, and a change in leadership within indices. As discussed previously, rising yields will continue to put pressure on certain segments of the stock market, such as technology and growth stocks, while other areas benefit from this environment. This volatility is a stock-pickers dream, and we anticipate active management to thrive during this time. We also see the selloff in bonds as a potential window of opportunity for fixed income investors, as these higher yields could be providing an opportunity to lock in higher rates, with our expectation that rates will remain range-bound between 1.5-2% on the 10 year Treasury. In volatile markets such as these, we believe investors will be rewarded for patience and for keeping the long-term perspective in mind. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.