Up, Up, And Away?

All eyes will be on rates in the week ahead, as market participants fret over the implications of higher yields for frothy equities. In some cases, stocks are trading at dot-com multiples.

Real rates rose rapidly last week, further denting gold and perhaps chipping away at some of the euphoria built into the most stretched corners of the market.

Some pointed to losses for a popular Ark ETF as indicative of what could befall high-fliers in an environment of higher yields and steeper curves. The IPO exchange-traded product suffered as well, as did a Goldman basket of unprofitable tech companies.

Bonds are off to their worst start to a year in more than a decade. With the US House poised to advance Joe Biden’s fiscal stimulus plan and the virus back-footed (for now, anyway), economic optimism is growing.

What’s good for Main Street isn’t always good for Wall Street (and vice versa). You’ve heard it before: Ever lower yields and flatter curves inflated the value of secular growth shares and other equities expressions tethered to the “duration infatuation” in rates. That came at the expense of cyclicals and value.

Over time, the situation reached absurd extremes. In 2020, for example, a simple growth/value ratio went parabolic (figure below).

The question remains the same: Can a market so accustomed to counting on leadership from a handful of familiar growth names continue to run higher in a pro-cyclical environment?

For many, that’s not a concern. One benign outcome could entail a healthy “de-frothing” in corners of the market that don’t “deserve” recent gains, while tech behemoths capable of maintaining robust top- and bottom-line growth (regardless of the economic zeitgeist of the day) hold up just fine, protecting the indices they’ve come to dominate.

That’s a nice thought. Whether it’s realistic remains to be seen. It’s doubtful, to say the least, that cyclical value is truly ready to take the proverbial baton, let alone run with it. The figure above is just one of many which illustrates how heavy that baton has become over time. The chart below depicts the “milestone” mentioned here on Friday evening.

This all comes as the Fed continues to pound the table. They will not only countenance an overshoot on inflation and a “run-it-hot” approach to the economy, they will actively seek to foster those outcomes.

There’s enough on the data docket in the new week to make things interesting. Regional PMIs will be watched for further signs of price pressures, housing data for evidence that the “bubble” is deflating, sentiment surveys for the consumer mood, and hard data for something tangible on which to hang various narrative hats.

Powell will dutifully (and virtually) march up to Capitol Hill to deliver his semi-annual monetary policy report. The messaging, one imagines, will be consistent.


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2 thoughts on “Up, Up, And Away?

  1. Once again, I wonder and worry that we have all “pulled forward” the impact of the almost inevitable rebound.

    The share prices of non-precious metals miners certainly reflect that! I haven’t looked at the impact of the spike in corn prices, but I’m sure shares of ag equipment, fertilizer and weed/pest control companies have benefited.

    These things cut both ways – anecdotally, I’ve been told that rising lumber and cement prices are discouraging some smaller-scale home builders.

    BUT, as any anal data wonk will tell you, changes in input prices in many PPI series (in the US and elsewhere) often end up only partially reflected in output price changes. The rest of it gets absorbed as higher costs, reducing profit margins. Not that those matter.

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