The S&P 500 closed on Friday at a new all-time high, now up 5.0% year-to-date, while long-term Treasury yield continued to rise, and have now returned to pre-pandemic levels. Inflation data for February came out on Wednesday. And Thursday, President Biden officially signed the $1.9 trillion stimulus bill into law. Read on for more of this weekly market news, 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.
Monday’s Market for the Week Update for 03.15.2021
The S&P 500 rallied through last week, closing the week at a new all time high, up 2.6% for the week, 3.5% month-to-date, and 5.0% year-to-date, as Treasury yields continued to rise and inflation concerns persisted. The 10-year and 30-year treasury bond yields are now up over 0.70% each since the start of the year, a 79% and 46% 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 4th consecutive week and now over 3%, still near historic lows, but the highest they have been since last summer. We are also seeing rising interest rates drive some investment rotation in the market – with last year’s high flying, tech-heavy Nasdaq up just 0.4% for the year, while Small Cap stocks are up nearly 20%.
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 closed the week at 2.27%, another increase from the week prior. 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%).
Last Week in the Markets
Gains in industrials, financials and consumer discretionary stocks drove the S&P 500 to its highest level ever, ending the week up 2.7% from the week prior, as technology stocks continued to underperform. Long-term interest rates continue to increase, driving bond prices down, with long-term Treasury bond indices now down 13.5% year-to-date. And inflation concerns continue to drive gains in Commodities, now up 18.5% YTD.
We continue to see recovery hopes and inflation concerns drive outperformance of cyclical, small cap and value stocks vs. tech stocks, which are basically flat year-to-date. Small cap stocks saw their best one-week performance of the year yet – up 7.3%!
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 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.
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 continue to rise, 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. The rates on 30-Year Treasuries now surpass 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, and the 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’s resumed its rally last week, following the Fed’s continued commitment to money supply increases and accommodative monetary policy.
The Economic Weekly Market News
This week’s major economic releases included Weekly Jobless Claims and the February Consumer Price Index update, which everyone is closely following given inflation concerns. There’s also an update on mortgage rates, as they are the most relevant rate for many family finances and most visibly impacted by rising interest rates in the market.
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 3/6 decreased to 712,000 from the previous week’s revised level of 754,000. This remains extremely elevated relative to pre-pandemic and even past recession highs. We have had an entire year of weekly claims higher than the highest weekly claims in any prior recession.
Total insured unemployment, under regular state programs, is down to 4.1 million people, an insured unemployment rate of 2.9%. However, this remains 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 2/20 (this comes at a longer lag) is far greater – 20.1 million, and increased again by 2.1 million, primarily under the expanded and extended pandemic assistance programs.
The PEUC, or Pandemic Emergency Unemployment Claims, where we see the biggest decline in claims above, is an extension of unemployment benefits for up to 24 weeks after someone has exhausted their state benefits. Both PEUC and Pandemic Emergency UC, as well as additional federal weekly benefits are all scheduled to expire at the end of March and phase out in April. However, the new stimulus bill, signed into law by President Biden on Thursday, extends these programs through the end of August, as well as expanding the number of weeks of eligibility from 24 to 48.
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.
How Rampant is Unemployment Fraud?
Several of you have asked me about fraudulent claims. There’s an article in this weekend’s WSJ that gives some data points around this. As individuals start to receive 1099 forms for unemployment insurance payments, more people are discovering they were victims of unemployment fraud.
They report that Ohio’s labor department has received 65,800 reports of fraudulent 1099s from individuals as of March 2 – meaning people who received 1099s reporting they received unemployment insurance payments, but never actually claimed unemployment insurance for themselves. Colorado has received about 11,700 fraud reports. This compares to approximately 1.1 million total continued claims under all programs in Ohio currently, and 216,000 total continued claims in Colorado, implying fraud rates of 6.0% and 5.4% for Ohio and Colorado, respectively.
February Consumer Price Index
With elevated inflation concerns, the markets were extra focused on this week’s Consumer Price Index release for February, as it is one of the key economic measures of higher inflation in our economy. The year-over-year change in the CPI for February was +1.7%, implying households paid prices for goods and services 1.7% higher this February than a year ago. Varying components of the CPI, however, showed far higher levels of price increases, with food +3.6% and energy +2.4%. Core CPI growth, excluding Food and Energy, was up +1.3%.
So why are people still worried about inflation? Let’s take a look at the contributors to the CPI to better explain why people are forecasting higher CPI increases as we head into 2021. Over the course of 2020, energy prices were down significantly, which helped offset price increases in other areas, like Food for the year. Energy prices have now recovered to pre-pandemic levels, making the year-over-year comparisons now additive to CPI increases vs. offsetting them.
What else feeds into the CPI basket? The breakdown of Core CPI, ex Food and Energy, is 25% Commodities and 75% services. Commodity prices, which have been relatively stable for the last several decades, are now showing signs of increasing too. Service price increases have slowed over the last year, running well below their longer-term averages, largely due to lower mortgage rates helping to reduce shelter costs. As we are now seeing mortgage rates increase again, we may see that trend upward again as well.
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 3/11/2021, the average 30-year rate was 3.05% with 0.6 points, now up +0.38% since the start of the year, a 14% increase.
Insights from Realtors on the Current Real Estate Market
For more on the real estate market, I hosted a Live Q&A with realtors from Connecticut and the Denver Metro area on Friday. Amanda from Connecticut and Olivia from Denver both talked about how “nothing about the current market is normal” right now. Inventory, in terms of months supply via listings, is near record lows, with every listing receiving 15+ offers within the first weekend and often selling over listing price. Both markets have seen price increases of 20%+ over the last year as well, and they talk about what that means for you financially in terms of how you think about your price point in your housing search, as well as needing to have flexible and creative lender support.
To hear more about what they had to say about the market, as well as their tips for buyers and sellers in the current environment, you can catch the replay of our Q&A below.
Amanda was also kind enough to forward me the tip sheet she made for buyers:
Calling All Realtors & Mortgage Experts…
I will be hosting a second LIVE Q&A this Spring and would love for you to share your expertise and what you are seeing in your local markets.
FRIDAY, 5/14 – 9:30AM ET
If you are able to join, please sign up here!
The Political Weekly Market News
The biggest news on the political front is the American Rescue Plan Act of 2021, also known as the $1.9 trillion stimulus bill, officially became law this week. The House voted to approve the Senate version of the bill on Wednesday, President Biden signed it into law on Thursday, and the first batch of $1,400 stimulus checks began hitting some accounts via direct deposit on Friday.
Now that it’s passed the political hurdle of becoming law, the next real test will be implementation. Issuing stimulus checks is straightforward enough, but other changes, like the expanded child tax credit, eliminating taxes on the first $10,200 of unemployment benefits from 2020 (when many have already filed taxes), create some challenges. The IRS, for one, will be making significant changes to the tax code, at the very same time they are processing tax returns, and those who have already filed, may have to file amended returns to claim their benefits.
There are also new programs being created at a range of Federal agencies, and it will be up to them to ensure programs are created so funds can be effectively distributed and reach the intended beneficiaries. A federal site, USASpending.gov, tracks how much of stimulus funds have been spent to date. It has not yet been updated for the latest $1.9 trillion bill, but shows that of the $2.7 trillion approved to date, only $1.9 trillion has already been paid out, with another $300 million committed, but nearly $500 billion remains unutilized entirely.
For those with questions about various components of the bill, I highly encourage you to start by referencing the full text of the bill itself here. You can search for specific components like “Child tax credit” or “unemployment” to get all the details of exactly what the law says. We will also get more clarity on implementation from the IRS in the days and weeks to come, so stay tuned.
The Virus Update
The biggest update here is The Covid Tracking Project, which came together to do an amazing job tracking the data of the pandemic before government agencies were doing it effectively, officially stopped their updates March 7. I have now shifted the data source here to the CDC’s Covid Data Tracker – the good news, the data is very similar, if not as user-friendly and easy to navigate.
The other even better news? The addition of the J&J vaccine to the vaccine rollout is accelerating both availability, as well as those fully vaccinated, as it only requires one dose. Over 35 million people are now fully vaccinated, up 22% in the last week!
For going on 2 months now, we continue to see most numbers head in the right direction. New cases did tick up slightly last week. We saw continued declines in daily deaths. Declines 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.
We also continue to see progress in the vaccine rollout. We saw a 17% increase in vaccines distributed and a 19% increase in vaccines administered last week relative to the week prior. So far, over 35 million people are now fully vaccinated, representing more than 10% 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
Look for updates on Initial Jobless Claims and 30-Year Mortgage Rates every week. Big news coming up this week? We will get the Retail Sales numbers for February, a good indicator for the health of consumer spending, on Tuesday. On Wednesday, the Federal Open Market Committee will release a statement following its second regularly scheduled meeting of the year. The FOMC sets monetary policy, determining the Fed funds rate, as well as its open market bond purchase activities. Many will be eager to see if any of their comments have changed in light of rising long-term interest rates since the start of the year.
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!