Both Sides Now – February 2021 Commentary
“I’ve looked at clouds from both sides now. From up and down and still somehow it’s cloud’s illusions I recall.”
- Joni Mitchell, lyrics from “Both Sides Now”
Inflection points contain a quality uniquely their own. They provide the observer the ability to gaze upon both past and future simultaneously though with the act posing a risk of confusing one for the other! Certainly, the disconnect this month between the commentary of some market observers and its contrast to what investors observe in the returns in their portfolios reveals at least the possibility of the existence of alternative realities.
The Bloomberg story of February 25th “In a Flash, U.S. Yields Hit 1.6%, Wreaking Havoc in Markets” contained verbiage leaving the reader uncertain as to whether they were reading about a circus or a war. Supporting the former were words such as “catapulted”, “tumbled” and “soaring”. “Jarring spectacle”, “led the plunge”, “amid the carnage”, and “bond yields were exploding” though suggested the existence of something a bit more ominous.
The grist for this particular mill of hyperbole is the interest rate on the Ten-Year US Treasury Bond which closed the month at 1.54%, a not insignificant increase from its level of 1.11% one month previously. Here it might be helpful to place that particular security upon a gurney and perform a bit of dissection. The stated interest rate, in this instance the aforementioned 1.54%, contains within that single number the presence of two. The “nominal” rate is the number referenced but there is a second number as well, the “real” or inflation adjusted rate. If expectations of future inflation rates have increased by more than .43% in the past month then the inflation adjusted rate is declining. If this is a sign that financial markets are starting to anticipate the reopening of the economy and a surge in economic activity, then this might be very good news.
It is quite possible that an increasing disconnect exists between the increasing amount of sunlight likely to be present in our futures and the darkness of our experience of the now almost one-year journey through the pandemic. The opportunity for investors equals the distance between expectations and reality and this is a salve that should stimulate the pulses of the bullishly inclined. With the Federal Reserve promising not to raise interest rates this year and with the US Congress due to pass the Biden administration’s request for an additional $1.9 trillion in federal spending with $1.2 trillion to be spent this year, 6% of the US economy, the winds in the sails of economic growth are strong indeed.
The judge whose verdict investors most care about of course are the returns of the financial markets themselves. Here the shift in market leadership which has been much in evidence since early November supports the sunny view of our current economic prospects. The index, named after Henry Varnum Poor, belied his surname by rising 2.8% for the month with the spread between value and growth continuing to wide as the value portion rose 6% for the month and is +4.3% for the year contrasting with growth’s -.04% and -.05% respectively. Energy stocks continue to race forwards with monthly returns of 21.4% and 26.2% year to date followed by Financials 9.4% and 6.9%. The equity share of the 60/40 portfolio contributed 3.8% to the portfolio’s 3% for the month and 3.4% year to date.
Mark H. Tekamp; February 27, 2021