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
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