by William Henderson, Vice President / Head of Investments
It was a rough week for Wall Street as higher bond yields caused investor concern. U. S. Treasury yields moved to their highest level since January 2020. U.S. Treasury Note closed the week at 1.54%, up 17 basis points from last week. For the week that ended February 26, 2021, the Dow Jones Industrial Average fell by -1.8%, the S&P 500 Index fell -2.5% and the tech-heavy NASDAQ fell by -4.9%. However even considering last weeks loses, all three averages remain in positive territory for the year. Year-to-date, the Dow Jones Industrial Average has returned +1.4%, the S&P 500 Index +1.7% and the NASDAQ +2.5%.

Rising bond yields generally point to an economic recovery, however, a rise in rates also increases corporate and consumer borrowing costs, which when taken alone can undermine the recovery, especially if rate rise too quickly. Last week’s move in the 10-year U.S. Treasury Note to 1.54% was a notable one because its yield now matches the yield on the S&P 500 Index.  This so called “inflection point” often causes a move from risky stocks to risk-free treasuries, where an investor can get the same yield without the gyrations that accompany investments in the stock market. On the other hand, increasing yields and a steepening yield curve (the measure of yields between overnight rates and the 10-year U.S. Treasury) helps banks, insurance companies, and other financial institutions as they now borrow low (based on short-term rates) and lend high (based on long-term rates). Last week, Fed Chair Jay Powell, committed to keeping short-term rates anchored at 0% for as long as needed to assure the economy fully recovers.

Vaccine distribution, production, and the release of an additional vaccine from Johnson & Johnson, are stifling the COVID-19 headwinds and cases worldwide dropped again last week. The Biden Administration is on track to deliver another whopping $1.9 trillion stimulus package as early as this week, while talking up yet another stimulus package shortly thereafter. Fiscal and monetary stimulus is unparalleled in response to the pandemic and we expect it to continue even as we move to a “normally” functioning economy.

We would be remiss if we did not point out the performance of the consumer. The Personal Saving Rate according to the Federal Reserve Bank of St. Louis, stood at 20%, significantly higher than pre-pandemic levels which were closer to 7%.

Further, again as reported by the Federal Reserve Bank of St. Louis on February 26, 2021, Real Personal Consumption Expenditures on Durable Goods reached a record $2.2 billion in January 2021. Durable Goods are represented by longer-lasting items, such as cars and washing machines; and personal consumption drives almost 70% of the U.S. economic output.

When the vaccine gets more widely distributed and herd immunity is reached, the consumer will be released to impact the hardest hit sectors of the economy such as travel and leisure. 

Some Wall Street economists are predicting second half GDP growth estimates well above 6%. Corrections in the markets like we saw last week, are expected and healthy for a well-functioning stock market. The best antidote for market corrections is a long- term outlook and a well-diversified portfolio.  

by William Henderson, Vice President / Head of Investments
For the week that ended February 19, 2021, the Dow Jones Industrial Average returned a nominal +0.2%, barely positive while the two broader indices were both negative for the week with the S&P 500 Index falling –0.3% and the NASDAQ –1.1%. With last week’s mixed results, returns nonetheless remained positive on a year-to-date basis. Year-to-date, the Dow Jones Industrial Average has returned +3.2%, the S&P 500 Index +4.2% and the NASDAQ +7.8%. For the week, the 10-year U.S. Treasury note moved significantly higher by 13 basis points to a post-pandemic 1.29%. 

No one can question, that the economy still is not “normal,” but the markets sure are acting that way. Year-to-date returns, noted above, are decent and certainly point to a positive year overall. Further, last week’s economic releases around industrial production, housing and retails sales were strong. Everything seems to be COVID-19 related. According to Johns Hopkins University, fresh COVID-19 cases for the week ending Feb. 14 were the lowest since October, at 2.7 million, a modest 2.5% increase in total infections from the previous week, the weakest gain since the start of the pandemic and less than half the rate seen a month earlier. Lastly, corporate profits (EPS) announcements continue to beat expectations, credit spreads are narrowing and capital expenditures by corporations are increasing. Soon, we are going to see rebounds in the sectors that were most battered by the virus-related economic shutdown.

Even as Treasury Secretary Yellen calms warnings about inflation, investors are fleeing bonds amid fears that inflation with heat up and return. The rise in the 10-year Treasury to 1.29% last week certainly shows investors are worried about bonds. Yields move opposite direction to prices and rising bond yields can hurt investors. The bigger story here is not bonds but instead the stock market which has multiple tailwinds supporting further positive movements. President Biden’s stimulus package, whether it is $1.4 or $1.9 trillion is going to be huge. Treasury Secretary Yellen and Fed Chair Powell are going to be patient around inflation moves and fully supportive of the administration’s efforts with fiscal stimulus. As mentioned, COVID-19 cases are down, the vaccine is being widely distributed and national herd immunity is expected by mid-summer or sooner.   

Things may not be “normal,” but normal is closer than we think. A common misstep all investors should avoid is trying to time the market, and 2020 showed just how detrimental timing the market could be for investors even in the short term. Stay focused on the long-term objective and realize “normal” is coming back.