Capital 19 Catch-Up

10Year Interest Rates cause investors to take profits in big names

It was a relatively calm week on Wall Street, but some of the biggest names might be losing their momentum. The decline was broad based among its major holdings. Shares of Apple, Microsoft, Tesla and Alphabet all finished negative for the week.

The S&P500 was down 0.7% for the week and the Nasdaq down 1.6%. Shares of Apple fell 4% and Alphabet was down 0.3%

Earnings season is now over and we don’t see last week as any reason for concern. It was just the market taking a pause after running so hard at the start of the month.

The news at present is all around rising interest rates. The 10yr Bond, which is an indicator for mortgages and credit cards, rose from 0.6% last year to 1.3% presently. This should come as no surprise with all the stimulus money being thrown around. Investors are demanding a higher premium to lend more money to the government, so they can give it out to people who will then open a Robinhood account with their $500 and attempt to become rich overnight. We like it because some of that money will find its way into our bank accounts when the novice crowd get it all wrong.

We have no need to fear inflation or rising interest rates. Last week Treasury Secretary Yellen said, a large stimulus package is still necessary to get the economy back to full strength, despite momentum suggesting that growth is off to a faster start than anticipated in 2021.

“I think the price of doing too little is much higher than the price of doing something big. We think the benefits will far outweigh the costs in the long run” she said. And she is not worried about inflation…..”Inflation has been very low for over a decade, and you know it’s a risk, but it’s a risk that the Federal Reserve and others have tools to address”

One year ago, the S&P 500 closed at an all-time high as COVID was tearing through China and quietly spreading around the world. What made the S&P 500’s new high even more impressive was the fact that just two days earlier, Apple (AAPL) issued a profit warning due to the fact that factory closures in China would constrain supply. Still, the market bounced back and rallied.

The S&P 500 headed into that weekend right near record highs, but then news over the weekend of an outbreak in Italy brought home the point that COVID wasn’t just a China problem. The following Monday, global equities plummeted and continued to drop every other day that week. During that week alone, the S&P 500 dropped more than 11% on its way to losing a third of its value in just five weeks. While the market seemed untouchable in mid-February, by late March people wouldn’t touch it with a ten-foot pole!

Fast forward to present day and things look very different. From its lows last March, the S&P 500 has rallied 80% and the Nasdaq has more than doubled. If you asked anybody back on March 23rd, 2020 where they thought the market would be today, no one would have guessed the S&P 500 would be testing 4,000 or the Nasdaq would be over 13,000. Heck, even at the pre-COVID peak, not knowing that a pandemic would shut down the world, if you asked most people if they thought the S&P 500 would rally 17% over the course of the next year while the Nasdaq would surge 40%, the majority would have probably said no!

While the path of the equity market since the March lows has been pretty steady to the upside, everything else has been a strange trip to say the least. We’re all hoping for a quick return to normalcy, but if the last year has taught us anything, things often only seem to get stranger by the day.

As the Fed flooded the system with liquidity, case counts started to recede from the first wave, Americans ventured out of their houses, and the economy started to thaw from its flash freeze. COVID came back in the summer across the sun belt and the rest of the country in the second half of the year. Unlike last Spring, Americans and the country did their best to learn to live with and manage around it. Life is still far from normal, but it’s also nothing like it was in March and April of last year.

What are expectations now? The consensus now expects the winter COVID wave to continue receding and vaccines to suppress any future waves. Economists see the economy growing at well above trend rates. Even better is that the Fed doesn’t even care! FOMC members are going out of their way to assure the markets that they aren’t going to remove any accommodation at least until employment is back to pre-COVID levels – even if inflation rises above its target levels.

What could possibly go wrong? Hopefully, nothing does, and we don’t expect anything to in the short-term, but if the last year has taught us anything, it’s of the dangers of cruise control. Investors need to be constantly on watch for changes and spot them as they unfold (or even better, before).

The big event for markets in the coming week is testimony from Federal Reserve Chairman Jerome Powell who speaks before congress on the state of the economy on Tuesday and Wednesday. We are expecting more of the same, a push for stimulus and a commitment to continue the Fed easy money policy.

We will soon be entering a time of year that is traditionally strong for equities. The only fly in the ointment is the 10yr yield. Keep an eye on that but be ready for further equity market gains in the months ahead.