When I Get to the Bottom, I Go Back to the Top of the Slide
by Zach Marsh on Mar 12, 2021
Interest rates continued their rapid ascent this week. The headline 10 year US Treasury note settling above 1.63% and the 30 year bond closing near 2.4%. For context, that is a 45% increase in the rate of the 30 year bond since the beginning of the year and a 79% increase in the rate on the 10 year bond. However, this week the market took the continued rise in rates a little more in stride. The S&P 500 finished the week up over 2.5%, the Nasdaq 100 gained over 2%, and the small-cap Russell 2000 gained a whopping 7%. Small cap stocks have continued to outperform large cap tech, a phenomenon which began at the end of the 3rd quarter last year.
This week’s gains in equities is a bit surprising given the continued rise in rates. Much of the gains in stocks last year were achieved via expanding p/e multiples—investors’ willingness to pay more for future earnings. Multiples can have the tendency to expand during periods of low interest rates, but tend to contract during periods of rising rates. While this fear was in full effect last week, when frothy tech names like Tesla were getting taken out the woodshed, this week the fear seemed to have subsided, however the Nasdaq did struggle today. A couple things might explain the market’s bounce this week. One, tech was dramatically oversold at the end of last week with names like Tesla and Ark Innovation ETF down over 35% from their highs. Second, the market may be increasing its earnings expectations going forward based upon the massive stimulus bill. I tend to lean towards the former explanation as markets being forward looking would’ve already discounted the impact of the passage of the stimulus since it was all but a foregone conclusion it was going to pass.
The bigger question for the market to answer is: where do rates go from here? If 1.5% on the 10 year was previous resistance, that level should/could now mark support and we could begin to see rates move in a range between 1.5% and 2%. Perhaps the stock market could continue to push higher in the short run, even with rates increasing, with a bunch of stimulus checks heading out to the same retail traders who have been behind the lockdown rally. As a group that contingent now makes up over 25% of all daily stock volume compared with just 10% of the market in 2019. It is never a bad thing to see more people getting involved in investing. But given that volumes indicate turnover I am skeptical how much of this is investing and how much of this is speculating. Investing is a long-term approach and speculating is chasing short-term rewards. Speculation is a sign of late-stage bull markets and indicative of mania behavior, and manias never end well.
I’ve been concerned for some time now about the increasing market and rising speculation, so far, the market has proven me a bit premature. However, the thing about manias is that they can last much longer than anyone suspects and can end when no one suspects. For the moment, though, all dips seem to be met with buying panics.
Thanks for reading,
Zach and Dave
Disclosures
All opinions are subject to change without notice. Neither the information provided, nor any opinion expressed, constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results. Tax laws are complex and subject to change. Calibrate Wealth LLC, does not provide tax or legal advice respect to the services or activities described herein except as otherwise provided in writing by Calibrate Wealth. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.
This material does not provide individually tailored investment advice. It has been prepared without
regard to the individual financial circumstances and objectives of persons who receive it. The strategies
and/or investments discussed in this material may not be suitable for all investors. Calibrate Wealth
recommends that investors independently evaluate particular investments and
strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a
particular investment or strategy will depend on an investor’s individual circumstances and objectives.
Investing in commodities entails significant risks. Commodity prices may be affected by a variety of
factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii)
governmental programs and policies, (iii) national and international political and economic events, war
and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities
and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other
disruptions due to various factors, including lack of liquidity, participation of speculators and
government intervention.
Foreign currencies may have significant price movements, even within the same day, and any currency
held in an account may lose value against other currencies. Foreign currency exchanges depend on the
relative values of two different currencies and are therefore subject to the risk of fluctuations caused by
a variety of economic and political factors in each of the two relevant countries, as well as global
pressures. These risks include national debt levels, trade deficits and balance of payments, domestic and
foreign interest rates and inflation, global, regional or national political and economic events, monetary
policies of governments and possible government intervention in the currency markets, or other
markets.