Monday Market Commentary 3-29-2021

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The S&P 500 continued to have mixed performance last week, mostly coinciding with the direction of long-term interest rates. The market eventually finished the week up +1.6%, as long-term Treasury yields fell slightly, after closing at their highest yields in a year the week prior. This week, we also got insights on the housing market, with Existing Home Sales from the National Association of Realtors and New Home Sales from the Department of Housing and Urban Development, as well as more insights into consumer spending and inflation with the release of the Disposable Income and Personal Consumption Expenditures from the US Bureau of Economic Analysis. On the political front, President Biden held his first live press conference since taking office, and the Treasury Secretary and Fed Chairman testified before Congress on the status and implementation of the CARES Act and other stimulus to date. Read on for more of this week’s market commentary, and you can find all the previous Monday Market Update’s here. You can now also get the weekly headline highlights on Finance Explained, my new podcast.

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Monday’s Market Commentary for 03.29.2021

Last week marked the one-year anniversary of the bottom of the market during the S&P 500… just one year ago, on March 23, 2020, the market had declined 34% from its peak in February 2020. Over the last year, the market has rallied and recovered like no one would have anticipated – +78% through Friday’s close. Investors have looked through the real-time impacts of the pandemic for the last year, pinning their hopes on pent-up demand and a big economic recovery. Many economists and analysts predict it. And more than ever, predict it to happen sooner – in 2021 – than before. However, coupled with that have been expectations of higher inflation, and we are reaching the point where investors want to see it actually happening to validate current sky-high stock valuations. These two dynamics are driving current market performance – when yields back off, the market trades up, and for the first time in a year, what a company actually reports as earnings, is starting to matter again.

On Friday, the S&P 500 hit a new all-time high following the first jobless claims report below 700,000 in a year and a softening of interest rates. It fininshed up +1.6% for the week, +4.3% month-to-date, and 5.8% year-to-date, as long-term Treasury yields backed off slightly from the highs they hit the week prior. The 10-year and 30-year treasury bond yields are still up over 0.70% each since the start of the year, an 82% and 45% increase in yield in less than 3 months.

How does this impact you? It increases the interest rates you pay. Last week, we saw 30-year mortgage rates increase for the 6th consecutive week and now at 3.17%, still near historic lows, but the highest they have been since last summer.

Where are we seeing inflation expectations? A major inflation indicator is the 10 Year Treasury to TIPS spread. Ten-year TIPS yields are currently negative, meaning current actual long-term interest rates are lower than expected inflation. The Treasury spread to TIPS widened again this week, ending the week at 2.30%. The last time the spread was this high was back in 2018, when the Fed was consistently raising the Fed Funds Rate, to offset inflation concerns. This spread historically has predicted inflation growth about a quarter ahead of time, and at current levels, estimates inflation of about 2% for the coming quarter (vs. latest level for February of 1.7%).

It should be noted the Fed’s own estimates for 2021 inflation now sit at 2.4%. Not helping inflation matters last week, we also had a traffic jam in the Suez Canal, after a ship got stuck, blocking the major trade channel between Europe and Asia for a week. Approximately 12% of global trade volume goes through the canal, but it accounts for 30% of the world’s daily container freight. Supply chains, already disrupted by the pandemic and facing shortages, will now be further impacted and shipping costs higher as ships reroute around Africa.

Last Week in the Markets

One interesting story in the markets last week… The Communications sector sold off last week somewhat inexplicably, as small initial declines forced margin calls on a major hedge fund, Archegos Capital Management, which now appears to be in complete liquidation mode. While the fund disclosed very little, some on Twitter are predicting it could be the largest fund failure since Long-Term Capital Management, which required the Fed to organize a consortium of 14 banks to bail it out to prevent widespread destruction in the financial markets. On the flip side, the overall market is much larger now too than it was when LTCM failed in 1998.

“It is still unclear exactly where Archegos Capital fits into the annals of spectacular hedge fund blow-ups. But the early signs are that it will probably prove the biggest since Long-Term Capital Management’s collapse in 1998” – ⁦@RobinWigg⁩
https://t.co/KOia7T6WrE

— A Edgecliffe-Johnson (@Edgecliffe) March 29, 2021

Major banks began selling off sizeable positions on the hedge fund’s behalf Friday – as much as $30 billion worth – driving stocks like Discovery (DISCA) and ViacomCBS (VIAC) down -42% and -47% respectively, as well as some Chinese stock positions, through the end of last week. The firesale drove two major banks – Nomura and Credit Suisse – to also warn of large losses due to their exposures to Archegos, sizeable enough to materially impact their earnings this quarter. This story is just breaking this morning, so expect more details – and impacts – to come out as the week moves on.

This could also drive broader market volatility as major banks take a closer look at and tighten margin requirements on all their hedge fund clients. These two separate headlines last week – a hedge fund failing and a boat blocking global trade and their impact on the market – in conjunction with the unprecedented market rally of the last year are collectively symbolic of a bigger theme. The market is currently at sky-high valuations with little to no margin for error. Going forward, I continue to expect greater market volatility due to this because the market is priced for perfection. While we are all optimistic for a strong economic recovery, there are no guarantees, and there will be missteps and shortfalls along the way.

We continue to see recovery hopes and inflation concerns drive outperformance of cyclical, small cap and value stocks vs. growth and tech stocks, which are basically flat year-to-date. Small cap stocks sold off last week through midweek, before recovering some, losing -3.1% for the week, but still outpacing all other indices year-to-date.

In the bond market, you can see a similar outperformance of higher risk securities, as investors seek higher sources of return. High Yield bonds, with lower credit and higher interest rates, have significantly outperformed Investment Grade and Treasury bonds year to date, though all bond indices are now flat to down year-to-date, as rising yields drive prices down. For more on the inverse relationship between bond yields and bond prices, see 10+ Different Types of Investments under How Bonds Work.

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The rise in the longer-term end of the current yield curve since the start of the year has driven the price of bonds down significantly. Longer-term interest rates have risen, spurred by the hopes of the economic recovery, as well as inflation concerns and the significant coming issuance of Treasury bonds, necessary to fund the $1.9 trillion stimulus package. Long-term rates did fall a bit last week, after hitting year-long highs the week prior, but the rates on 30-Year Treasuries have now returned to pre-pandemic levels at the end of 2019. This steeply upward sloping yield curve is representative of a more normal, growing economic environment. Compare it to the yield curve last March, an inverted curve, when long-term Treasury rates hitting their lowest levels ever, which is predictive of a recessionary environment.

Concerns over inflation, and the rapid growth in the money supply, have fueled the rise in more speculative investments, like commodities and cryptocurrencies, like Bitcoin. Want to know more about what’s driving inflation concerns? Check out this post on Higher Inflation. Bitcoin did give back some of the gains of the week prior, likely given the softening of interest rates.

The Economic Weekly Market News

This week’s major economic releases included:

• Monday: Existing Home Sales for February
• Tuesday: New Home Sales for February
• Thursday: Weekly Jobless Claims & Mortgage Rates
• Friday: Personal Consumer Expenditures & PCE Price Index (Fed’s inflation measure!)

Existing Home Sales for February

Existing home sales for February were down -6.6% on a seasonally-adjusted annual basis vs. January, but were still 9.1% higher than February 2020. The fall-off is attributed to historically-low levels of inventory, which is also driving rising prices. The median sales price nationwide increased +15.8% vs. the year prior, to $313,000.

Generally speaking, a “normal” housing market has ~5-6 months inventory – meaning there are enough homes listed to equal 5-6 months worth of sales. Over that means it is a buyer’s market, where buyer’s have more negotiating power than sellers. Below that is a seller’s market. Right now, there is 2.0 months supply, making it very much a seller’s market. At the end of February, housing inventory was at a record low 1.03 million units, down 29.5% vs a year ago, a record decline. The typical listing sold in 20 days, less than a month, also a record low.

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What does this mean if you are in the market for a home? Be prepared for competitive bidding processes, homes selling over listing price, and reserve some of your cash savings to cover any potential appraisal gaps (if the bank doesn’t appraise your home for what it sells for and you have to make up the difference vs. the mortgage). For more tips, be sure to check out the Live Q&A I held with realtors from different markets earlier this month and their tips for buyers in the current market.

New Home Sales

After Monday’s report on the Existing Home Sales, Tuesday we got an update from the Department of Housing and Urban Development on the New Home side of the market. Housing starts fell in February, largely due to the severe winter storm that impacted much of the southern US last month, but creating a temporary setback in an already supply-constrained market.

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Last month, 775,000 homes were sold on a seasonally adjusted annualized basis, down vs. the month prior, but +8.2% above the prior year. Inventories remain low here as well, with just 312,000 new homes for sale at the end of February, representing 4.8 months of inventory at the current sales pace.

Again, as in the existing home market, limited inventory (as well as rising material prices) are driving up prices. The median sales proce of new homes sold in February was $349,900, up +5.3% vs. the year prior.

Weekly Mortgage Rates

I have started watching mortgage rates more closely as long-term interest rates have started rising. While mortgage rates still remain at near historically low levels, they are rising weekly as market rates rise more broadly.

Freddie Mac publishes the results from its Primary Mortgage Market Survey every Thursday, giving the weekly US average for 30 Year Mortgage rates. As of 3/25/2021, the average 30-year rate was 3.17% with 0.7 points, now up +0.50% since the start of the year, a 19% rate increase.

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Weekly Jobless Claims

I continue to closely watch the labor market for signs of improvement, as it has experienced the most negative impact in the economy, and its recovery is most critical to a full economic recovery for everyone. On Thursday, weekly jobless claims for the week ending 3/20 fell to 684,000 from the previous week’s revised level of 781,000. This marks the first week in more than an entire year that new claims fell below the highest level ever reported pre-pandemic of 695,000.

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Total insured unemployment, under regular state programs, is down to 3.9 million people, an insured unemployment rate of 2.7%. However, this remains only a fraction of those covered under the expanded pandemic and emergency programs at both the state and federal level.

Total insured unemployment under these programs for the week ending 3/6 (this comes at a longer lag) is far greater – 19.0 million, this week up by 0.7 million claims vs. the week prior. This total has bounced around a lot in recent weeks. I’m not entirely sure why – if it’s due to the timing of benefits expiring before being extended or something else. The PEUC, or Pandemic Emergency Unemployment Claims, where we see the biggest decline in continued claims, is an extension of unemployment benefits for up to 24 weeks after someone has exhausted their state benefits. These were previously slated to expire last week, but under the American Rescue Plan Act officially passed into law two weeks ago, the expanded Federal benefits programs are now extended to the end of August, so we will see if that ends some of the volatility around those in the coming weeks, as it often takes some time for these changes to filter through to implementation by each state.

Big picture: this is really what insured unemployment looks like – and you can see how continuing claims show essentially a stalled, if not worsening, labor market based on those collecting unemployment insurance.

Disposable Income, Personal Consumption Expenditures & the PCE Price Index

Last, but not least, last week we also got February numbers on disposable income and personal consumption expenditures from the Bureau of Economic Analysis. This reports, in aggregate, income for all households and aggregate consumer spending, which as you recall, makes up 70% of our entire economy.

We saw a spike in Disposable Income in January with the issuance of the second round of stimulus checks. In February, Disposable Income fell -8.0% vs. January given that elevated comparison. In the close-up chart below, you can see the impact of the stimulus (as well as expanded federal unemployment benefits in the months prior) in January, pushing Disposable Income above the trendline, and how it falls back towards the trendline after.

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You can also see how that translate to consumer spending. Personal Consumption Expenditures also fell in February, down -1.0%, vs. January. Despite unprecedented levels of federal spending, direct stimulus checks, and expanded unemployment benefits, all of which have acted to keep income at or well above the pre-pandemic trendline, Personal Consumption Expenditures still fall short of pre-pandemic trends. Why?

Because as long as people are still concerned about their economic future – the risk of job loss especially – savings rates remain elevated. People are choosing to save money at a higher rate instead of spending it. The personal savings rate for February was 13.6%. Since March 2020, the personal savings rate has averaged 17.5% vs. a 6.1% average since 2000, and 8.8% average since the data series began in 1959. Now, don’t get me wrong – higher savings rates are good for families financially. However, it is the abrupt change that has an adverse impact on our consumer-driven economy.

March numbers will include the impact of the third round of stimulus checks – the biggest yet. Will people save them or spend them?

In addition to Personal Consumption Expenditures, the BEA also releases the PCE Price Index, or how much of consumption is impacted by changing prices. This is the measure the Fed watches most closely as an indicator of inflation.

The look at both the overall PCE Price Index, as well as a core index, absent the impact of Food and Energy, which can be more volatile overtime. For February, the PCE Index was up 1.6% vs. a year ago.

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The biggest current driver of price increases is energy prices, up +3.6% in the last month. Over the last year, the largest driver of price increases has really been food, up +3.3% over the last year.

The Political Weekly Market News

There were two major political headlines relevant for family finances last week:

• Testimony by Fed Chair Powell & Treasury Secretary Yellen before Congress on the implementation of the CARES Act and other pandemic measures taken to date
• President Biden’s First Live Press Conference

First, the Congressional testimony by the Fed and Treasury. The prepared remarks by both Powell and Yellen are linked above. Both strongly uphold that the significant actions taken by the Federal government via increased fiscal spending, as well as the accomodative monetary policy taken by the Fed, were and continue to be essential to the economic recovery, especially for those most vulnerable and impacted by the pandemic.

Of significant interest is also the Testimony Addendum provided by the Treasury Department, which highlights all the funds they have overseen and the status of the various programs created under the CARES Act (passed last Spring), the Consolidated Appropriations Act (passed in December), and the American Rescue Plan Act of 2021, just passed. Collectively, they created more than 15 entirely new programs administered or involving the Treasury Department.

I also included a few excerpts of the Q&A sessions from their testimonies below, one from each side of the aisle to give you a sense of what each party is most concerned about in the current environment:

The Virus Update

Some concern in this week’s virus update, as new cases ticked up +13.0% nationwide last week. New cases are also now being seen in younger age groups, as most older people are now vaccinated (73% of those over 65 have at least one dose, and nearly 50% are fully vaccinated).

Experts continue to stress social distancing and masks need to continue to be used until the broader population acheives similar levels of vaccination. Currently, only 15% of the total population is vaccinated, 20% of those over 18%.

For going on 2+ months now, we had seen numbers head in the right direction. But last week, there is definitely a visible uptick in new cases. We still see continued declines in daily deaths. Declines to date are attributed to a combination of subsiding from the post-holiday spike, as well as the continued aggressive rollout of the vaccine, which began in mid-December.

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We also continue to see solid progress in the vaccine rollout. We saw a 15% increase in both vaccines distributed and administered last week relative to the week prior, and are now vaccinating more than 2 million people daily. Note that vaccination data continues to be updated for up to a week, so expect the most recent week’s data to increase. So far, over 50 million people are now fully vaccinated, representing 15% of the population. Many experts believe we need to get to 65-80% vaccinated to achieve herd immunity, which would allow life to resume with some level of normalcy.

The Week Ahead

It’s a relatively quiet week for economic data, but the biggest news will be the details of the Infrastructure Plan, which President Biden is set to unveil at some point this week (at his press conference he said Friday, his press secretary previously said 3/31, which is Wednesday).

Economic released expected this week include:

• Thursday: Weekly Jobless Claims & Mortgage Rates
• Friday: February Employment Report

For More Information…

For a more detailed history of all the metics shared, check out When Will the Economy Recover – updated monthly, which gives a more detailed overview of market and economic indicators, as well as their historical context.

Questions? Feel free to leave them in the comments below, in the weekly question box in my Instagram stories, or now you can leave me voice messages for the Finance Explained podcast too!

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