What's Been Working
As we have now turned the calendar to March this market has really rewarded what did not work last year. Small Caps have outperformed large caps, sectors like energy and financials have been the huge winners this year.
This can leave the glass half empty crowd asking, “how much longer can this run?”. There are many voices adding to this crowd, including some very large money managers, including a particular two that I really respect. While this has caught my attention, I’m just not able to move to this camp.
Although the outperformance from the beat down sectors has been outstanding, there is still some ground to make up to get back to where they were previously. Energy for one is still -20% since the start of the drop in January of 2020.
Interest rates have been the headline grabber here recently. Yields on longer term bonds (10 Year) have seen a pretty big move this year, moving from under 1% at the start of the year, to right around 1.5% last week. If you’ve watched the business networks recently there are undoubtedly headlines stating the market is moving down based on higher yields and vice versa. Although I acknowledge that this may indeed be the fact in a short-term scenario, higher yields are ultimately a sign of a healthier economy.
With the fed controlling short term rates and stating they will be keeping them low for an extended period, and the rise in the mid to long term rates, providing the platform for the economy to operate on its own without government intervention. When there is a nice spread between short- and long-term rates, it gives banks the incentive to loan to companies that would not otherwise be able to borrow when times are tight. The steeper the yield curve, the more banks make in lending. Banks borrow short term and loan long term and keep the difference. We have not had a normalized yield curve for years now, and there are many out there talking like it’s a problem.
I for one would like to see the overall economy walk by itself without the proverbial government training wheels. There will be short term volatility due to the expectation of more money being pumped into (or out of) the economy, however longer term (which is the world we play in) I believe having a normalized yield curve provides the best opportunities for investors.
It’s not fake money, it’s not wall street bets, it’s fundamentals, and that makes sense to me.
In summary, we may end up going through a consolidation phase now. It would be perfectly normal for this to produce a 5-10% pullback and still maintain the longer-term upward trend. If this in fact happens, we will be looking to increase our equity positions. Too much liquidity to think anything different.
With that here’s the buy/sell
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