Equity markets continued to struggle this week, with higher bond yields fueling the selloff in technology shares, the largest sector in US markets. Treasury yields remain elevated, with the 10 year yield hovering around 1.5%, nearly 50% higher than at the start of the year. Investors believe this shift in yields is being driven mostly by a powerful economic rebound in the making, with signs everywhere that the uptick has begun. Manufacturing data showed this week that growth is at the highest level since August 2018, while the Atlanta Fed is predicting 10% growth for the first quarter of 2021. Those figures, coupled with nearly $4 trillion in savings for consumers over the last year, point to the potential for the strongest recovery in decades ahead. Economists are predicting an unprecedented shopping spree as the economy reopens, with retailers, restaurants, and entertainment venues set to be overwhelmed by demand. Of course, if consumers horde their cash for fear of job cuts or choose to pay down debt, growth could come in well under expectations. Meanwhile, frailties remain, with the jobs market in particular exposing weakness. Over 8 million jobs remain lost since last April, and initial jobless claims rose slightly last week.
The main drivers of the bond market volatility we have seen, and by extension equity market turbulence, have been inflation fears, economic growth, and Fed policy expectations. The market is clearly expecting the Federal Reserve to move towards policy normalization with higher rates sooner rather than later, which we believe is unlikely. The Fed has made their intentions clear about healing the labor economy, and that they will not move on rates until employment is mostly healed from the pandemic. Furthermore, the Fed has indicated they are comfortable allowing inflation to run hot for an extended period to help support the economy and to make up for the many years of undershooting their targets on price increases. While the Fed believes that inflation will almost certainly pick up near-term due to supply constraints and base effects, the longer-term trends of lower rates for longer remain well anchored in our view. To that end, we are confident that while rates may have a bit higher to run from here, that ultimately sustained higher yields are unlikely. The trends in place for most of the last decade will likely keep rates down for the longer-term, namely low growth, excess savings, and aging demographics.
We have added marginally to equities lately, with the dip presenting some limited opportunities in our view. The tailwinds of ongoing support from the Federal Reserve, as well as fiscal stimulus ahead and possibly an infrastructure spending bill later this year, all provide reasons to be optimistic about the direction of travel for risk assets ahead. Additionally, fundamentals behind US corporate profits look terrific with the economy rebounding, and we think current valuations are not overly stretched based on that driver. While some pockets of the market continue to appear frothy, we believe the current pullback could be helpful in washing out some of the excess. 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.