● Rapidly rising rates. Rising Treasury yields are weighing on the broader fixed income market. Yields have been climbing since August, but the pace really quickened in February. The 10‐year US Treasury yield rose 0.34% – the largest monthly gain since Nov. 2016 – to hit 1.40%, its highest level since Feb. 2020.
● Healthy improvements. The rate surge can be attributed to optimism from a broadly improving economy and a vastly improved COVID‐19 backdrop, including a vaccination rollout in which more than 80 million doses of vaccines were distributed in the U.S.
● Not many places to hide. Other than the short duration and credit sectors (floating rate and high yield), bond investors couldn’t hide from losses. Of course long duration sectors were hit the worst, but even the broad market U.S. and global aggregate bond indices fell for the second straight month.
● Crosscurrents. Rising rates and increased volatility have resulted in some noticeable market rotations. Big winners in 2020 like large cap and growth stocks have underperformed in 2021 while small cap and value stocks have rebounded strongly.
Asset Class Performance
Like January, February started strong for global stocks with nothing but gains for the first half of the month, but the second half was mostly declines. On the other hand, bonds were under constant pressure throughout the month.
Stocks advance, but volatility increases with rapidly rising rates
The hot topic in January was the surprise, and spectacular, rise in relatively unknown “meme stocks” that were bid up by retail investors coordinating through Reddit groups and internet forums (the stocks were some of the most heavily shorted by institutional investors and susceptible to huge short squeezes). GameStop was the poster child, but despite the dramatic headlines and fantastical stories, the mania was relatively short‐lived and didn’t have much of an impact on other major asset classes like the bond market or currencies. As noted our January edition, bond spreads, a measure of market dislocation, had no discernable reaction to the historical activity, and volatility, among the most‐shorted stocks. Some remnants of the action in those most‐shorted stocks persisted in February, but the real story of the month was the bond market. We have been writing about the increasing signs of inflationary pressures for months, but inflation fears finally took center stage last month and caused both the bond and equity markets to wobble. In the final days of the month, the yield on the 10‐year U.S. Treasury note (UST) briefly reached 1.61% before it eased back to close February at 1.405%. Still, that was 34 basis points higher than the 1.065% level it started the month at and 49 basis points higher than the 0.913% it started the year at. The yield on the 10‐year UST bottomed on August 4, 2020, when it stood at just 0.507%. Markets had been taking the ascending rates in stride, but the surge in February was the largest monthly gain since November 2016 and forced investors to take notice. As shown in the chart below, although bond volatility didn’t spike in January with the GameStop craze, it did jump in February – to its highest levels since April 2020. Stock volatility has risen, but it is still well below the January GameStop levels.
The good news is that rates are rising primarily for the right reasons… an improving economy. U.S. retail sales posted the best month since June 2020, manufacturing and services purchasing managers’ indices (PMIs) jumped to 58.5 and 58.9, consumer confidence hit its highest level since November, and housing data remains strong.
A potential $1.9 trillion in stimulus may be on the way soon to keep the economic momentum rolling. In addition, the COVID‐19 stats are also improving nicely. Hospitalizations are down in the U.S. for 50 days in a row and are now ‐66% below the January 6 peak. The percentage of positive tests has fallen to 4.2%, nearly at the lowest level of the pandemic (4.0% last summer). The U.S. has averaged 2 million COVID‐19 vaccination shots per day over the last week and the first Johnson & Johnson one‐dose administrations just started this week, with 72+ million vaccinations already administered to date in the U.S. Bottom Line: The January GameStop mania has largely passed and global stocks advanced in February. However, inflation concerns made equity and bond markets uneasy in the final days of the month with volatility jumping in both. But positive economic trends, real progress on the pandemic and new stimulus should be tailwinds in the near term.
©2021 Prime Capital Investment Advisors, LLC. The views and information contained herein are (1) for informational purposes only, (2) are not to be taken as a recommendation to buy or sell any investment, and (3) should not be construed or acted upon as individualized investment advice. The information contained herein was obtained from sources we believe to be reliable but is not guaranteed as to its accuracy or completeness. Investing involves risk. Investors should be prepared to bear loss, including total loss of principal. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Past performance is no guarantee of comparable future results.
Source: Bloomberg. Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange‐traded funds recommended by the Prime Capital Investment Advisors. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High‐YieldBond(iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 ValueETF);MidGrowth(iSharesRussell Mid‐CapGrowthETF);MidValue (iSharesRussell Mid‐Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares U.S. Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by: 30% U.S. Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4%Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
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