Wobble

As we wrote last week, bond yields are meaningfully higher, and global equities are generally flat year-to-date.  Real bond yields are rising, reflecting the re-ignition of our $20 trillion economy.  Positive real bond yields are normal.  A positive Treasury term premium underpins a free market economy.  The transition away from the pandemic will be bumpy.  The same for risk assets.  On average, the stock market pulls back by 5% roughly three times a year and by 10% once a year.  Again, on average. 

We ask clients the rhetorical question: Where do you think the stock market and bond yields will be three years from now, higher or lower?  At RiskBridge, our crystal ball is just as murky as everyone else's.  However, it's not a vast analytical leap to suggest by the end of 2023 that the 10-year Treasury yield is closer to 3.0% and the S&P 500 closer to 4,500.  Time is an investor's single best arbitrage opportunity.  Think long term.  Allocate long term.  Tune out the media noise and align your risk to your objectives. 

U.S. nonfarm payrolls rose 379,000 in February.  The leisure and hospitality sector showed significant job gains.  Economic re-ignition.  Unemployment (U-3) fell to 6.2%. Underemployment (U-6) is stuck at 11.1%.   Our friend Don Rissmiller at Strategas says, "Today's jobs report was an appetizer for what's to come, in our opinion." We agree.  In our view, 2020 was the year of the "V" shaped stock market.  2021 will be the year of the "V" shaped jobs market.

Our analysis suggests the stock market and bond yields will finish higher by the end of this year.  Market and risk preferences alter when real yields rise.   Risk budgets and factor exposures have to adjust.  Now is the time for clean, simple portfolio structures.  As the Big Bank strategist said, "Don't get too fancy." One way to play the rising real bond yield environment is to be overweight financials like banks and insurers and underweight high-flying technology shares.  Bank stocks have a long history of sensitivity to rates, but technology stocks require low (or negative real yields) to justify their astronomical valuations.

We expect the stock market wobble to continue for a couple of weeks, and then investors will start to focus on corporate earnings season.  If U.S. real GDP is going to grow 6-7% this year as some expect, then earnings projects remain too low. 

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Benchmarks and indices are presented herein for illustrative and comparative purposes only. Such benchmarks and indices may not be available for direct investment, may be unmanaged, assume reinvestment of income, do not reflect the impact of any trading commissions and costs, management or performance fees, and have limitations when used for comparison or other purposes because they, among other things, may have different strategies, volatility, credit, or other material characteristics (such as limitations on the number and types of securities or instruments) than RiskBridge account.  It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any comparative benchmark or index. We make no representations that any benchmark or index is an appropriate measure for comparison. Please see below for brief descriptions of some of the major indices mentioned in this material:

The S&P 500® Index is a market capitalization-weighted index of 500 of the largest U.S. companies, designed to measure broad U.S. equity performance.

The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based market capitalization-weighted bond market index representing intermediate-term investment-grade bonds traded in the United States.

The Core Personal Consumption Expenditure Price Index provides a measure of people's prices for domestic purchases of goods and services, excluding food and energy prices. The core PCE is the Fed's preferred inflation measure.

The Cboe Volatility Index (VIX) is a real-time market index representing the market's expectation of 30-day forward-looking volatility.  Also known as the "Fear Index, it is used as a way to measure market risk.

The ICE BoA MOVE Index is a well-recognized indicator of U.S. interest rate volatility and bond market sentiment that measures the implied yield volatility of a basket of one-month over-the-counter options on 2-year, 5-year, 10-year, and 30-year Treasuries. 

The Merrill Lynch 10-year U.S. Treasury Futures Total Return Index measures the performance of a fully collateralized rolling 10-year U.S. Treasury futures position.