The large cap technology sector bounced back this week as bond yields fell. It is a see-saw market filled with several cross-currents. But if you want to know where stocks are going, keep your eyes focused on the U.S. Ten-Year Bond yield.
In my last column, I explained how rising bond yields are like kryptonite to the continued performance of what I call "super tech stocks." Over the last two weeks, the NASDAQ 100, for example, experienced a 10 percent-plus down draft, as bond yields rose to 1.60 percent from 1.25 percent. Investors sold FANG stocks, and technology shares in new-era sectors, like solar and electric vehicles, and bought old economy stocks, like in energy, financials, and cyclicals.
This week, that trade reversed somewhat as bond yields stopped rising, drifted lower, and seem to be stabilizing around 1.50 percent -- until Friday. While the S&P and Dow Indexes pulled back a little in response, NASDAQ dropped 1.5 percent. The question is whether the rate rise in yields is coming to an end, or will we see yet another backup in yields as investors become even more concerned over future inflation.
There is no reason why the yield on the "Ten Year" couldn't rise further, in my opinion, maybe as high as 1.80 percent to even 2 percent later in the year. After all, that was where yields were on the Ten Year just before the pandemic. What could drive yields higher? Inflation concerns.
I believe the Federal Reserve Bank Committee is expecting the inflation rate to hit their long-term target of 2 percent in the next few months. Fed Chairman, Jerome Powell, has already said they would be willing (and happy) to see that happen. That would be a textbook and natural occurrence in any recovering economy. But what the Fed expects, and what the markets are prepared for, may be two different things.
"As long as yields rise gradually, and not all at once," say the experts, then investors can and will adjust accordingly. That remains to be seen. In this world of instant price reactions and compressed time periods, I am not so sure "gradual" is in the dictionary of today's traders. To them, a 25-30 basis point rise in yields could mean the end of the world. I fear a mad exit for the door could occur all at once at some point. It is a possibility, so be on guard.
The good news is that the $1.9 trillion American Relief Bill passed in what amounted to a one-party rescue of the American people. Not one Republican voted for the rescue plan, despite the fact that between 65-80 percent of Americans approved of the plan. The ink was barely dry on President Biden's signature, however, before investor attention turned to the passing of a future infrastructure package.
Unlike the relief package, which was passed through the budget reconciliation process, an infrastructure bill of real substance would require bi-partisan support. If that turns out to be a non-starter, President Biden could still provide some money ($300 billion or so), but nothing like the $2 trillion that would be needed to really address the nation's decrepit highways, bridges, seaports, and airports.
An infrastructure bill would actually provide a needed stimulus to grow the economy, while providing a real need that is long overdue. But it would also take longer to thread its way throughout the economy and would require a year or two before we would really see the impact in the data.
In any case, the prospect of such a bill will be enough to occupy investors' attention over the next few months. I suspect "infrastructure plays" will be bid up in anticipation of this potential government spending program. This happened four years ago, you may recall, when the Trump Administration announced their intentions to pass similar legislation. We all know that effort hit a brick wall, despite a Republican-held Congress and White House.
Today, with countries like China breathing down our necks, the U.S. is falling further and further behind in so many areas. We fiddle in bitter partisan politics, while the rest of the world plows ahead. A substantial infrastructure program would be a first step in stemming our economic slide.
In any case, we have two weeks left of volatility, so use the time to employ any excess cash you may have on down days. I expect stocks to regain their luster in April, so hang in there.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at email@example.com.
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