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The Bottom Line

● Rising bond yields have begun to weigh on equities. Stock indices fell while bond yields continued to climb with the 10‐year U.S. Treasury yield closing the week at 1.34%, up from 1.2% last week and just 0.9% at the start of 2021.
● The S&P 500 ended the week down ‐0.7%, after falling all four days of the holiday‐shortened week. Small cap and technology stocks fell even more as the Russell 2000 lost ‐1.0% and the Nasdaq Composite sank ‐1.6%. The Dow Jones Industrial Average eked out a small gain of +0.1% .
● Retail sales surprised to the upside with a big beat to end three months of declines. Industrial production and capacity utilization also beat forecasts with solid gains.

Reflation trade puts rally on pause

COVID‐19 statistics are the best in months with positive tests now back below 5.0%, hospitalizations have fallen 38 days in a row and a redown‐54% since the peak on 1/6, and new daily cases are down ‐72% from their 1/11 peak. Economic data has been decent too. Retail sales smashed expectations, industrial production and capacity utilization were solid, Markit U.S. Services PMI was the best in nearly 6 years, and building permits and existing home sales were at the best levels since 2006. Earnings also continue to outperform forecasts as S&P 500 profits have already surpassed their pre‐pandemic level. Bloomberg data shows that with 419 companiesreportedearningsgrowthisup+6.2%versus expectations for a decline when the year started. So why did the stock rally stop this week? The surge in bond yields is a likely culprit. The U.S. 10‐year Treasury yield hit 1.34%, more than twice its all‐time low level from August. Rising rates are a headwind for many growth companies who are expected to earn the bulk of their profits in the future. So when rates rise, the present value of their future earnings declines. Many Wall Street analysts think the 10‐year yield could rise to 1.75% to 2.0% before the end of the year.

Digits & Did You Knows

BOND MARKET – As measured by the Bloomberg Barclays U.S. Aggregate Bond Index, the median annual return of the taxable bond market over the last 45 years (1976‐2020) was a gain of +6.5% (total return). The taxable bond market has produced a positive total return in 42 of the last 45 years, i.e., 93% of the time. But in 2021, as of Friday 2/19, taxable bonds are down ‐1.8% (source: Bloomberg, BTN Research).

WE’RE DOWN, THEY’RE DOWN A LOT – The U.S. economy fell ‐3.5% during calendar year 2020. The economies of the 19 countries that use the Euro as their common currency, i.e., the Eurozone, collectively fell ‐6.8% during calendar year 2020 (source: Department of Commerce, BTN Research).

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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.

Advisory services offered through Prime Capital Investment Advisors, LLC. (“PCIA”), a
Registered Investment Adviser. PCIA doing business as Prime Capital Wealth Management
(“PCWM”) and Qualified Plan Advisors (“QPA”).
© 2020 Prime Capital Investment Advisors, 6201 College Blvd., 7th Floor, Overland Park, KS 66211.

Chris Bouffard
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