Markets Have Stabilized After the Mid-June Sell Off: Market Commentary from Cabana’s CEO – June 28, 2021

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A realistic and stated inflation outlook provided by the Federal Reserve, paired with signs of bipartisan cooperation in reaching an infrastructure package, has stabilized equity markets after the sell off we saw just over a week ago. We are again at all-time highs and the volatility index (VIX) has fallen back below 20 at lows for the year – around 16. Banks completed their mandated stress tests and all major institutions met minimum capital requirement, even under the most severe scenario posed. It appears banks have weathered COVID and are in good shape. While this is obviously critical to the workings of capital markets, it is also important relative to central bank monetary policy.

Last week saw a return to the cyclical reflation trade with industrial, transportation, energy and financial sectors being purchased by investors. Interest rates remain contained, with the 10-year Treasury trading just below 150 bps. Commodity prices remain high, but futures contracts are beginning to fall. Most notable to us is lumber, which has fallen 40% from its spring highs. If other major commodities (like copper and aluminum) follow suit, it will be strong evidence that supply is better prepared to meet the surge in demand that has occurred as the world’s economies have reopened.

These underlying commodity markets have a major impact on how business is done across the board. They impact earnings and the price of almost everything that we buy, not to mention all-important interest rates. We will be watching the housing market for signs that home builders can resume building houses at prices that consumers can afford. This has become a major problem as runaway lumber prices caused the cost of a house to jump beyond the reach of many buyers. A healthy housing market is critical to the sustainability of this new bull market that we are experiencing.

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February 23, 2021

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