If You Don't Like the Weather (Markets) Just Wait

It's Spring in NYC and like the markets the weather changes day by day: it hit 70 degrees yesterday while Sunday’s low is forecast at 25 degrees. Investors have contemplated bubbles and bears, corrections and new ATHs from one week to the next.

Its transition time; in a piece written about 3 weeks ago, I suggested that higher rates are a good thing, that investors should ignore the inflation kerfuffle, keep calm and carry on - that still feels right.

By now one has to be living not on Mars but on a planet even further away to not know that inflation will mechanically pick up in coming months, that growth will boom & the world’s Central Banks will welcome both while investors fret & worry about too much of a good thing.

Asia, the Covid leader, has set the pace with the RBA providing aggressive forward guidance while the ECB made it clear yesterday that it won’t allow higher rates to derail the recovery; tighter EU financial conditions support the move even with 10 yr German BUNDs at -.3%.

The Fed is on tap next week followed by what some expect to be a 1M new jobs print in March as vaccinations surge & re openings commence (2.2M 7 day av with J&J single shot likely to provide a step up). Keep in mind the economy is 9M jobs or more jobs below pre Covid levels while Capacity Utilization sits at decade low 76% vs yr ago 80%.

Near term one can wonder if it is really stimulus fears driving rates - Marc Chandler at Bannockburn notes the rolling 60 day correlation between 10 yr UST rates and WTI sits at .96, highest since GFC. JPM now sees Brent peaking at $80pb in Q2 2022; in the interim one wonders if the Biden Climate Plan will curb oil’s rally?

There is a lot of chatter about how Wall St and the Fed have diverged in terms of growth & inflation expectations. Look for Jay Powell to address next week. I expect much of the ongoing UST concern to be S/D related with BofA noting that 2021 net new supply is likely to reach $2.8T, up $1T from last year and almost $2T from 2019. The good news is the hedged yields now look pretty appealing to Euro/yen based buyers - this week’s auctions had decent BTC ratios and foreign participation.

My point would be the folks who forecasted a 1.2% YE 2021 10 yr UST yield have all adjusted to somewhere around 2% (where I have been since Nov) while an economic BOOM is now common wisdom. Thus a fair bit should be in the price. US credit offers a good example - IG debt is off to its worst start since 1980, down 4% while credit spreads remain quiescent & financial conditions remain easy. HY continues to OP.

In equities the Rotation action has been extraordinary with the 20 day relative performance of DJIA/Nasdaq the widest since the 2000 tech bust. I see this as VG news in that the equity markets have been able to adjust quickly to selling Growth/Big Cap Tech and buying non US, cyclical/value without sinking the broader equity market. Not only is the equal weight S&P at an ATH, but so is the market cap S&P though equal weight SPY is up 2x SPY ytd.

Bubble talk has been replaced by bear market chatter & all the high flying names/themes of the past few months have been blasted. Now we watch to see if ARKK, TSLA, Apple etc can reclaim key technical levels in advance of what is expected to be a strong Q1 Earnings season. (ARK ETF Is No Ticking Time Bomb)

 With all these rapid fire moves what's an investor to do? It's super easy to get chopped up if trading or freeze if allocating. We need to get used to it IMO. I expect secular bull and bear markets in equities and rates, something not seen since the 1950-60s, which would suggest markets with frequent 5% ”pothole” pullbacks that are scary but impermanent and thus useful for positioning/allocating.

Note how markets go right to pain points and then reverse: USTs push to 1.6% with Rescue Plan passage and then back off, Oil tests $70 with Saudi attack and then backs off, ARKK hits 200dmav and then bounces. JPM notes the Momentum trade is now the least crowded since the GFC bottom!

I see the opportunity set as expanding ( that “Golden Age” of Asset Allocation I wrote about in Nov) & continue to invest thematically around climate/clean energy. Infrastructure and carbon are two areas of interest here, both likely to be less volatile than the EV and battery segment. The Cyber space remains of interest as does the nexus between fintech/banks & Crypto.I see all three as secular & supported by my paradigm shifting Covid speed model (Investing Thematically).

EM debt is also interesting with EMLC deeply O/S and the Brazilan Real testing ATLs with the Lula news - some see the Real as 45% undervalued during a likely commodity boom; MXN is another large EM Fx that has been heavily sold while China’s Yuan now occupies pride of place in EMLC.

Within the Tri Polar World framework, Tech continues to drive regional integration as China’s Two Sessions concludes its easier to buy its tech stack rather than build it; helped by financial market inflows it plans to expand ODI while the EU approves $150B to build a regional supply chain for semis & the US freaks over the erosion of its AI lead.

The speed is unrelenting; this week marks one year since the WHO declared a Covid pandemic - it's worth reflecting on all that has occurred since - just maybe not during market hours but over the weekend.

Then come back Monday ready to battle. I start Monday off with the good folks at BTV at 7 am EST - grab a coffee and join us!