This was the week that the 10 year US treasury note reached 1.64% on Friday afternoon – a level not seen since January 2020!
TECH TECH TECH – The market’s sweet spot turning somewhat sour?
We’re halfway through March and it hasn’t exactly been easy! A lot of focus again on interest rates and that seems to be having implications for everything else in the market, in particular TECH shares!
Interesting fact: Month-to-Date Nasdaq 100 shares are -0.2% vs S&P 500 +3.5%. This would be the Nasdaq’s worst monthly performance relative to the S&P 500 since early 2016. Almost 5 years.
The post COVID rotation (from growth into value) seems to be in full force and it continues to feel like it still has room to go!
There seems to be a continuous cycle in the market at the moment. We talk about US data looking good, that leads to concerns about inflation so rates start to move, which means people re-value their growth stocks particularly in tech. They sell their tech shares but they are still positive on the economy so they buy value S&P 500 stocks. This is a very common rotation that has played out at the beginning of almost every previous economic cycle. It is this transition that is responsible for large losses on the go-go names from last year. As of today, Tesla is 21% down from its Jan peak | even after a +16% pop this week! Apple has been sinking lower and lower over the last five weeks. Netflix has ended three of the last four weeks lower than where it started!
So what does this mean? Is the tech trade over for the next 5-10 years?
It was well-known and flagged by many that tech felt frothy at the end of January and some of the overflowing excitement from 2020 needed to calm down – so it’s been good to see that happen. It is not just people mindlessly chasing after these stocks – investors are thinking about what they are buying. A decline of 10-15% really sets the stage for the potential for tech stocks to really push on higher again. A small decline is regarded as a positive as it shows that there are investors who are keen and / or willing to buy these stocks when they are cheaper as opposed to there only being sellers.
In the meantime, expect tech stocks to whip around – this week alone the Nasdaq 100 was -2.9% Monday and +4% Tuesday and then continued to sink lower to end the week -0.9%. Interestingly correlation between 10-year treasury yield and the Nasdaq 100 is at -0.67% which can be interpreted to tell us that whenever treasury yields rise tech stocks should fall. It will be interesting to see if that correlation remains as yields push higher.
The biggest buyer of bonds in all of Europe – the ECB
Earlier this week the European Central Bank had its monthly meeting and it came out with some surprising announcements. They had previously mentioned their concerns about the rising interest rates in the USA.
On the whole the US seems to be well on the recovery path back to a pre-COVID world. Europe on the other hand – not so much. It seems to be struggling with third waves and terrible vaccination programs. The Eurozone’s GDP is expected to decline in Q1 2021. This would be two quarters of decline in a row – officially indicating that Europe was in recession. Overall Europe is expected to grow at 4.0% this year with the US at 6.5%. A pretty sizeable difference!
So the ECB decided it would speed up the purchase of government and corporate bonds it had already planned to buy. Their aim is to keep credit in the Eurozone cheap! They will still spend the $2.2 trillion buying bonds which they had previously allocated. An interesting line from ECB President, Christine Largarde, was “making sure that financing conditions are favourable” on the continent.’ A pretty bold statement. The ECB is devoted to keeping lending costs low in the EU with the aim of helping struggling governments, corporations, and individuals.
This move surprised a lot of people, including me! The expectation was for positive rhetoric from the ECB and a general indication of what they might do – not any real action! The move rippled through the European financial markets. It slammed European bond yields and interest rates in the European financial markets reached their lowest levels in three weeks!
AMERICAN RESCUE PLAN
This week also saw the new American stimulus plan passed through Congress and signed by the President. I am rather jealous as it contains a $1,400 payment for most Americans as well as expanded unemployment insurance, funding for schools and public health, and state and local government aid. The legislation also includes a per-child cash payment of at least $3,000 for one year, an expansion of Obamacare subsidies for two years, as well as aid for restaurants, agriculture, and small businesses. In short there are a lot of different things in it!
Economists seem to agree that the stimulus will provide a big boost to the economy. An independent rating’s agency, Moody’s, suggested that the plan will add up to 7M jobs to the US economy – a big positive! There is also talk about the program having far-reaching positive impacts on other countries. HOWEVER, there are also some concerns that the size and scale of the spending could lead to an inflationary spike. Then there are the people who are concerned about the additional borrowing and what that means for the national debt…. déjà vu?
