“Out of the woods” is everywhere and always a perilous phrase. No matter the context, it invokes an almost instinctual rejoinder, also involving timber: “Knock on wood.”
With that obligatory caveat, it was nice to see the last of this week’s supply events come and go without incident. Thursday’s long-bond auction could be described in similar terms to Wednesday’s 10-year sale: “Decent. All things considered.” Yes, it tailed, but the stats were all right, and with Verizon’s multi-part monster casting a long shadow and SLR uncertainty hanging in the air like stale cigarette smoke, it certainly could have gone worse.
Words like “uneventful” were tossed about, and sometimes that’s exactly what you want. That adjective was also applicable to Wednesday’s CPI report, and with both inflation and key duration events in the rearview, this week’s hurdles were largely cleared.
Equities powered higher into the US afternoon, as investors looked ahead to stimulus. Joe Biden signed the legislation (passed by the House on Wednesday) into law ahead of schedule in an effort to speed enactment.
The S&P moved back to record highs and the dollar fell to the lows of the day following the 30-year sale, bolstering risk assets further. A better-than-expected read on jobless claims and the ECB’s tweaked language around asset purchases likely added to the good vibes.
It’s been a fairly raucous couple of weeks looking simply at “freedom of movement,” if you will (figure below). But all’s well that ends with Mount Everest a bit higher, I suppose.
Yields appear to have stabilized, and that’s absolutely crucial. Without that, tech and other secular growth “winners” were at risk of suffering a deeper drawdown which, given their weight in the benchmarks, still has the potential to be destabilizing no matter how excited you might be about the prospect of a value resurgence and strength in cyclicals tied to an economic renaissance stateside.
On Wednesday, I fretted that the Nasdaq’s failure to respond to the acceptable 10-year sale and benign inflation print suggested tech’s bounce might be of the “dead cat” variety. It could still turn out that way. We may be unwittingly wandering through “Pet Sematary” (King’s misspelling was intentional, of course). But Thursday picked up where Tuesday left off — with tech leading the charge.
Remember: Many analysts believe quite a bit of the forthcoming stimulus money will end up in equities. That’s more or less true depending on the demographic, but as discussed at length in “Free Money And What To Do With It,” the inflow could come in at around $170 billion, according to a Deutsche Bank survey.
Goldman last week raised their forecast for household net equity demand. “Accelerating US economic growth has been the most significant driver of equity purchases by Households during the past 30 years,” the bank’s David Kostin wrote, on the way to lifting the bank’s projection to $350 billion, up from $100 billion previously. That higher forecast “reflects faster economic growth and higher interest rates than we had assumed previously,” Kostin said, but it also factors in additional stimulus payments to individuals.
While JPMorgan’s Nikolaos Panigirtzoglou recently suggested stocks could be vulnerable to rebalancing flows at quarter end, (some $107 billion of potential equity selling), he also said inflows tied to the stimulus payments might help offset that flow.
I suppose this is a good time to remind retail investors to stay grounded. As China’s Securities Times put it on Thursday, while attempting to convince the country’s notoriously mercurial retail crowd not to sell into a burgeoning bear market, “new investors should keep calm and rational and they should seek returns for the long- term.”