Equity index futures markets opened on Sunday night, and almost immediately showed some strength, a strength that would abate as the hours passed, only to renew once again as late night melted into early morning. Bond traders or should I say bond trading bots tried to rally those markets, at least out on the longer end of the U.S. Treasury curve as well. So it is, we'll watch the relationship between the two markets and perhaps act or at times react to a perception that the debt (especially sovereign) market will impose not by will, but by sheer weight of impact itself upon the "lesser" financial markets.
We ask ourselves, and others as well... at what point do these yields or interest rates draw investment away from equity markets? The answer might have been right here, or even well below these levels, had President Biden not just signed into law the $1.9T fiscal stimulus/support package that just as surely as the sun rises in the east, will flood financial markets with liquidity as money supply expands. There was a lot to take in last week, but I think one has to take a somewhat logical approach. Understand the terrain, so to speak.
What do we know? We know that although, yields/rates out on the longer end of the Treasury curve have gone higher. The US 10 Year Note went out on Friday night paying more than 1.62%, its highest level in more than a year. Yet, we also know that the U.S. Treasury Department held three large auctions of three, 10 and 30 year paper that all saw increased appetite at these higher yields both in the aggregate and most importantly from overseas. We also know that despite rumors to the contrary, that U.S. equities had a week for the ages. The Dow Industrials, Dow Transports, S&P 500, and Russell 2000 all stand at or very close to all-time highs. Even the supposedly out of favor Nasdaq Composite picked up 3.09% for the week, outperforming the S&P 500 over the five day period.
The answer would be that there does seem to be a knee-jerk inverse relationship between longer dated U.S. debt and "growthy" type equities, However, beyond the algorithmic knee-jerk, equity investors, even those more inclined to invest in parts of the market that have run with sustained elevated valuation metrics or have benefited more than other parts of the economy in a shuttered environment... appear to be more comfortable with higher interest rates as long as the printing press keeps humming.
Though last week might have been confidence building, I do not approach the coming week with all that much confidence. Strange feeling. I must admit. For the week, as I have mentioned, all of our major equity indices did well. The Nasdaq 100 was the week's weakest link in the chain at +2.12%. This performance put that index into positive territory (just barely) for the year. All 11 Sector Select SPDR ETFs finished in the green for the week, but perhaps not in the order that one might have expected. Sure, Consumer Discretionaries (XLY) claimed the week's title as champion at +6.3%, but the REITs (XLRE) and Utilities (XLU) finished second and third despite being sectors often considered to be interest rate sensitive or "defensive" in nature. Now, the REITs make some sense, the strongest industry within that sector last week had a lot riding on a national economic rebirth. The Dow Jones Hotel & Lodging REITs Index climbed an incredible 9.1% for the five day period.
Utilities though? Largely stable names that investors use to avoid market volatility that traditionally pay more in terms of dividend yield than do other sectors? One would think Utilities to be in direct competition with a softer US Ten Year Note for the same demographic... the revenue driven, risk averse investor. By the way, Energy (XLE) finished dead last and still up 1.2% for the week. Let that sink in. The weakest sector SPDR ETF gained well more than 1% over five days.
Outperformance for the week was also heavily skewed toward small to mid-cap names. The S&P 400 ran 5.3%, while the S&P 600 and Russell 2000 both ran roughly 7.3% over the five days. Those three indices are now up 14.7%, 24.9%, and 19.1%, respectively, year to date. Compare that to the Dow Industrials, S&P 500 and Nasdaq Composite. The three most highly focused upon large cap indices are now up 7.1%, 5%, and 3.4% year to date. Far more pedestrian.
This Means to Us?
Whom among us, with anything to lose could say with any certainty whether or not the Nasdaq Composite is either in a state of correction, or safely back on trend? There has been this year not a sustained level of rotation driven distribution, but certainly enough rotation here and there in an extremely erratic fashion to leave investors with some doubt. You know how I feel. I feel that high tech is the driver, and these rotations present more as opportunity than warning. Still as traders add on dips as we have over the past two weeks, those traders must take care to unload tranches of equities bought on dips as markets peak.
Why? Simple my friends. One... to ring the register, for we are here for one reason... to make some dough. Otherwise we could laze around in bed until 5 or 6 a.m. like other mortals. We stalk the night because we would rather be the hunter than find ourselves prey. Two... balance. If one only buys dips, one eventually runs out of flexibility, or cash. Net basis? Of course this hurts net basis, or at least the net basis as it reads out on your platform for each position. You have to wrap your head around that, or you will soon find yourself financially handcuffed.
The Week Cometh
Just a few earnings on tap for the week ahead. Outside of the firm-specific, corporate earnings will not be our focus this week. Aggregate trading volumes weakened as days passed, and as equity prices rallied. That can be a sign of trouble. That can also be a sign of an FOMC policy meeting coming up in just a few days. The latter, if not the case last week, will surely show its face early this week. One can probably expect lighter trading volumes through early afternoon on Wednesday, which is also St. Patrick's Day.
Wall Street's expectations are not high for any kind of policy change to be announced this week. With equity markets seemingly willing for now to co-exist with elevated longer dated yields, at least at these levels, there will be little outcry for the central bank to tackle the longer end of the curve. Fed speakers, including the chair, have shown little concern that current and short-term future fiscal conditions will create a level of consumer level inflation that "they" will not be able to tamp down if necessary. There will be no mention of a renewal of "Operation Twist" unless it comes up in the press conference. Nor will there be any mention, at least in the official policy statement of any retargeting of the average maturity of those assets held on the Fed's balance sheet. Bear in mind that enlarged money supply is conducive too, but does not cause inflation. There can be no broad-based consumer level inflation at the core without increased velocity. Science. Period.
As the nation still has a long way to go in terms of labor market recovery, consumer prices, at least officially... are not out of control. The FOMC will stay the course in terms of rate targeting and asset purchases. Where there will be change will be in the economic projections. These will be the first projections made since December. Since then, the Democrats surprisingly won both of Georgia's seats in the U.S. Senate and a much larger stimulus package has been passed as a result. Does this impact expectations for that already mentioned inflation? Surely there will be significant revisions made for GDP expectations just based on federal spending alone. (That is positive, but also unsustainable.) The FOMC as a group had placed the initial increase for Fed Funds Rate (by design) out in 2024. Does that move up a bit. 2023? Maybe even 2022, or late 2021? I think it has to. Whatever the dot plot shows, will impact our marketplace like a shot out of a cannon. That pint of Guinness will have to wait until closing time on Wednesday.
The Bitcoin Bop
My guess is that most readers saw bitcoin trade as high as $61,788 in U.S. dollar terms on Saturday. The reasons could be many, from corporate investment such as that made by Tesla (TSLA) , to speculation ahead of stimulus checks hitting bank accounts, to the increasing number of derivative products being created as ways for the public to invest in either bitcoin or cryptocurrencies indirectly as a means to address demand through a broader swath of the financial marketplace. I have dragged my feet on bitcoin, perhaps missing out on opportunity. I have been waiting on regulation as I think it inevitable as more and more nations on this planet will find such stores of value that respect no border as more threat than asset.
I have thought such regulation might come from the central banks as this is where the most direct competition will be felt. Bitcoin was down more than 7% early Monday morning, trading below $56K, as reports swirl that India will move to not only ban cryptocurrencies, but allow current crypto-asset holders up to six months to liquidate, while actually criminalizing possession, issuance, and mining of cryptocurrencies moving forward. There have already been moves made to reduce the use of these assets in both China and Russia. Should the use of bitcoin or other cryptocurrencies as means of moving wealth across borders in undetected fashion end up broadly denied, then there would obviously be a lot less value found in holding these assets, in nations with susceptible fiat currencies to begin with. More to come on this story. Much more.
In and Out
S&P Dow Jones made a number of announcements late Friday regarding index composition that will impact these stocks this week as we head into the March quarterly rebalancing. First, the simple stuff. Penn National Gaming (PENN) , Generac Holding (GNRC) , and Caesars Entertainment (CZR) will all move into the S&P 500 while exiting the S&P Mid-Cap 400. Going the other way... SL Green Realty (SLG) , Xerox Holdings (XRX) , and Vontier (VNT) will go from the S&P 500 to the S&P 400.
Now, follow the bouncing ball. NXP Semiconductors (NXPI) moves into the S&P 500 forcing out Flowserve (FLS) , which heads to the S&P 400. This knocks Edgewell Personal Care (EPC) out of the S&P 400 and into the S&P Small Cap 600. That move ultimately bumps Exterran (EXTN) out of the S&P 600.
In addition, Broadcom (AVGO) , T-Mobile (TMUS) , and Linde (LIN) will replace Allstate (ALL) , Kinder Morgan (KMI) and Schlumberger (SLB) in the S&P 100, while all six of these names remain in the S&P 500.
All of these changes will be effective prior to the opening bell on Monday, March 22nd, one week from today. That makes this Friday's closing bell key to all funds forced through mandate to make these changes.
One Last Thing
Advanced Micro Devices (AMD) launches the firm's next generation enterprise EPYC processor this morning at roughly 10:30 ET in a virtual investor event hosted by CEO Lisa Su. Expect to see some algorithmic action around the semiconductor space at roughly that time.
Economics (All Times Eastern)
08:30 - Empire State Manufacturing Index (Mar): Expecting 14.7, Last 12.1.
16:00 - Net long-Term TIC Flows (Jan): Last $121B.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlight (Consensus EPS Expectations)
After the Close: (BEKE) (.84)