Is the Continued Rise in Interest Rates Really Cause for Concern?: Market Commentary from Cabana’s CEO – February 23, 2021

5 months ago

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The broad-based U.S. equity indices (S&P 500) sold off again yesterday, which made five consecutive down days (note that we made up for some of these losses at market close today). The reason for the recent drops given by most analysts, is the continuing unabated rise in interest rates. The 10-year Treasury yield has now risen 81 basis points since August 1, 2020. That is a whopping 144% increase. No doubt that the big jump in yields is causing some institutional reset in asset valuation, particularly among fixed income assets, but the market is way overdue for a breather.

Let’s not forget that we have seen the S&P 500 bounce 77% from its March 2020 lows. That is also a huge move on the back of technology shares, hope for a resolution to COVID and additional stimulus being passed by the new administration. It seems like equity and bond markets have been getting dressed for the prom these past nine months and are finally walking in the door. Interest rates have gotten off the mat and are ready. Stocks are ready. Cyclical sectors, like industrials and financials, have perked up and look ready. Even beaten down energy and other commodities have caught a bit. Everyone is at the dance and now it’s time to see if the band shows up.

These next few weeks are going to tell us a lot. Is the vaccine going to finally put COVID back in its box and return our lives to normalcy? Will Congress pass a stimulus package that is sufficiently targeted to those in need, while giving confidence to everyone else? Can the old-world economy breathe life back into the labor force, thereby providing jobs to millions who remain out of work? The answer to these questions will drive asset prices for the medium to longer term. If the answers are yes, we are on the cusp of a new and possibly sustained bull market in stocks. To me, this feels a lot like 2003. This bull market will be brought on by real demand side growth, rather than Central Bank monetary manipulation. I am not suggesting that we haven’t had real earnings growth since the financial crisis, but it hasn’t been organic. Today feels different – and that is a good thing in my opinion.

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February 23, 2021

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