March 8th, 2021
The wrestling match between the stock market and interest rates continued last week, with rates temporarily coming out on top as yields moved up and stocks pulled back. The rise in rates again weighed on growth stocks by increasing the discount on future earnings , while value stocks managed gains. The week started out on a strong note amid continued optimism about the rollout of coronavirus vaccines. Fed Chair Powell spoke at a jobs panel organized by the Wall Street Journal on Thursday, where he offered no new commitments to continued asset purchases or other actions, however, while simultaneously restating the policymakers’ willingness to see inflation rise above 2%. Powell’s satisfaction with the current stance of monetary stimulus appeared to disappoint investors broadly, leading to a sharp sell-off in equity and bond markets on Thursday afternoon. The tension between growth hopes and inflation fears was evident in the market’s reaction to the week’s most closely watched economic data, the February U.S. jobs report. The report surprised significantly on the upside, with nonfarm payrolls rising by 379,000, roughly twice consensus estimates. Stocks vacillated on the news: rising, falling and then rising sharply again. For the week, the S&P added 0.8%, the DJIA gained 1.8%, and the Nasdaq fell 2.1%. Asia Pacific stock markets didn’t fare any better; the Shanghai Composite Index retreated 0.2%, Japan’s Nikkei lost 0.4%, but India’s stock market rose 2.7%. European bourses were volatile with the markets finishing the week modestly higher. Your BSD Global Tech Hedge Fund slipped 2.2% this past week; year-to-date our Fund has added 1.1%. We have positioned the BSD Global Tech Hedge Fund with the expectation of more market volatility; the Fund is 97% invested across a couple dozen tech vendors and tech end-users, with a 48% short equity indice hedge that will incrementally grow if the market deteriorates. Our BSD Global Tech Hedge Fund will be protected from significant market drawdowns, but if global stock markets continue to defy the ‘actual economy’ and climb higher, we will marginally participate in those gains.
Over the last few weeks, the air has completely come out of the frothiest parts of the market that saw mind-boggling moves to the upside in the 2-3 months prior to their recent peaks. In areas like SPACs, software, AI, solar, EVs, and cannabis, we’ve seen declines across the board ranging from 25-60%. These areas could certainly continue lower, but for now the “frothiness” is completely gone. Given the huge surge in app-based and online brokerage accounts that represented the “return of the retail trader” over the last six to nine months, we have to think that a significant amount of pain is being felt in the accounts of new traders that only thought stocks could go up just a few weeks ago. For long-term investors that have lived through more than a few months of markets, seeing “pre-revenue” stocks rally 100%+ in weeks can cause just as much uneasiness as a down market, so the fact that the “easy money” has been wiped out recently has probably actually helped the market backdrop in some ways.
The Covid-19 U.S. aid package is on track for final congressional approval in the week ahead, but it could be a double-edged sword for markets. The legislation should be greeted by optimism around the powerful lift it could give the stock market and the economy, but it could also be met with concern about what an historically large stimulus package could do to inflation and interest rates. Another wild card for stocks could be how interest rates behave around upcoming Treasury auctions. There is a $38 billion 10-year auction on Wednesday and a $24 billion 30-year bond auction on Thursday. Traders are watching these closely, after a historically weak 7-year Treasury note auction in February sent rates higher, even for the 10-year. There is CPI consumer inflation data Wednesday. While it is expected to show little inflation, the next couple of reports could show inflation compared to the drop-off in prices when the economy was shut down last year.