Notes on the Week Ahead

The Calm before the Surge

It has been, by any reasonable measure, an eventful first quarter. At the start of the year, the pandemic was raging and vaccines had barely begun to roll out. Today, despite a recent tick up in cases, the light at the end of the tunnel is looking brighter and closer. At the start of the year, a very contentious election seemed destined to be followed by political gridlock.

Runway for the Rotation

In recent months, falling political uncertainty, two powerful rounds of fiscal stimulus and the rollout of covid-19 vaccines have resulted in a long-anticipated rotation in markets. Since early November, value stocks have outperformed growth, small caps have outperformed large and international stocks have outperformed their U.S. counterparts, with each of these moves reversing a multi-year trend. U.S. long-term interest rates have been at the center of this move, with 10-year Treasury yields rising by almost a full percentage point between the day after the 2020 elections and last Friday.

Time for a Fed Change of Tune

The pandemic has had an unfortunate impact on my piano practice. 

In truth, I have never been a promising student - my musical efforts have always rather resembled roadwork on an overused urban highway - that is to say, not so much an exercise in inventive construction as one in increasingly inadequate repair.  Still, for some years, my piano teacher would relieve the general ear strain by suggesting some new tune for me to work on.

Boil then Simmer

As a hungry child, growing up in a large family, some forays into cooking were essential.  My early rice-making experiments, however, were exercises in frustration.  I would start with a large sloshing pot of icy water and, having transported it to the stove with wobbly hands, I’d dump in a bag of rice and wait for results. It seemed to take ages for the water to heat up, as I peered down hopefully at the submerged pile of grain. Eventually, things would begin to bubble and steam, but long before the rice came close to “al dente”, the water had boiled down, exposing an island of uncooked rice, with an acrid burning smell emanating from the bottom of the pot.

Interest Rates and Equities in a Strengthening Economy

The week ahead will be a busy one for market-moving events and economic data.  However, beyond the noise, investors will continue to mull two crucial questions: First, how far could interest rates rise and, second, what could that mean for equities?

Interest Rates in an Early Spring

Long-term interest rates have risen sharply in 2021 so far, with the yield on the 10-year Treasury bond climbing from 0.93% on January 4^th to 1.34% by last Friday.  This move is a logical reaction to better news on the pandemic, encouraging data on how the economy has weathered an early-winter surge in covid cases, and rising prospects for significant fiscal stimulus.  However, given this positive news flow, the bond market may have under-reacted so far, suggesting that investors need to be positioned for further increases in rates as economic springtime turns to summer.

Investing With a Lead

In a year when everything has been different, it was comforting to watch an almost normal Super Bowl with Tom Brady, albeit wearing the wrong uniform, winning yet again.  It wasn’t that close a game – Tampa Bay established a lead in the first half and just did what they needed to do to hold that lead to the end. 

A New Year for China

This Friday, February 12^th, marks the start of the Chinese New Year and the Chinese people, like the rest of humanity, will say a hearty good riddance to the last year with hopes for easier times ahead.  The Year of the Ox should be better, with vaccines gradually allowing for a return to normal life and China should be able to build on its early economic recovery and resume its very long trend of strong economic growth.

The Race to Full Employment

In two weeks, in Daytona Beach, Florida, 40 cars will compete for the most coveted prize in NASCAR.  As the cars slowly circle the track in the pace laps before the green flag drops, the noise of engines revving will give notice to all of the speed to come.  In a similar fashion, while the U.S. economy has slowed to a crawl over the winter, there are growing reasons to expect a sharp acceleration in the months ahead.    

The Pandemic Crisis and the Policy Reaction

In most decades, there are dramatic events that interrupt the course of history and the last twenty years have seen at least three obvious examples of this.  However, more often than not, it is the reaction, in public attitudes and policy, rather than the event itself, that shapes the path taken by society in its aftermath. The horror of 9/11 laid the groundwork for wars in Afghanistan and Iraq.  The global financial crisis led to an era of much tighter oversight of financial institutions that, in turn, curtailed lending, contributing to the slowest economic recovery in modern U.S. history.