Should you have any questions regarding these notes, please do not hesitate to contact Kevin at (678) 401-6102
At-A-Glance
7 min read
Markets have recently pulled back from their mid-February, all-time highs. Some of the hottest areas of the market, including technology, stay-at-home and emerging market stocks have pulled back the most, as we have seen a rotation toward value stocks.
Much of the pullback has been driven by sharply rising interest rates. The yield on the 10- year Treasury bond has moved from approximately .9% at the beginning of the year to a high of 1.6% last week. This is a rise of more than 70% in a two-month period.
The increase in economic activity sparked by the rollout of the vaccines, continued low interest rates, as well as support of the bond market by the Federal Reserve bank, and additional stimulus in the pipeline are sparking inflation fears over the next one to two years.
Adding to these inflation fears, the ISM Manufacturing Report showed a surge in growth. The manufacturing gauge rose to the highest level since February 2018. Anecdotal comments from participants showed supply chain constraints, material shortages and prices rising rapidly.
The committee continues to believe that the backdrop will remain constructive for risk assets such as stocks, real estate, and commodities over the cyclical horizon. However, we do expect bouts of volatility to continue given our economic and political backdrop.
The committee met on the afternoon of March 8th to review the most recent economic and investment data, and to review the allocation strategies of the portfolios managed by the committee members.
Recent Market Pull Back Explained
We are happy to report that all our model portfolios continue to outperform their risk adjusted benchmarks over the most recent one, three and five year periods of time.
The markets have seen a pull back from their recent highs over the last several weeks. This is not surprising as the markets have moved up dramatically since late October, as the election outcomes became clearer, and as the rollout of the vaccines was imminent. Sectors of the market that have moved up rapidly since the market lows of late March 2020 were also the areas that pulled back the most recently. Technology, stay-at-home and emerging market stocks all pulled back 7-10%.
It seems that the catalyst for the recent pullback is a rise in interest rates sparked by fears of inflation over the next couple of years. Recent projections of economic growth from a number of economists and market strategists that the committee follows suggests that real GDP growth could be as much as 6-8% this year. To put this in perspective, we have not seen economic growth at this level in nearly forty years.
This is being fueled by a combination of factors including the continued rollout of the vaccines, as well as cases and hospitalizations continuing to drop across the United States. This should lead to the economy continuing to reopen, sparking an acceleration of economic activity. Additionally, the Federal Reserve Bank has pledged to keep borrowing costs low, and to continue purchasing $120B per month of both Treasury and mortgage bonds to support low interest rates in the bond market.
Adding to inflation fears, the ISM Manufacturing Reports showed a surge in growth. The manufacturing gauge rose to the highest level since February 2018. Anecdotal comments from participants showed supply chain constraints, material shortages and prices rising rapidly. See below:
Manufacturing PMI® at 60.8%
February 2021 Manufacturing ISM® Report on Business®
New Orders, Production & Employment Growing
- Supplier Deliveries Slowing at Faster Rate; Backlog Growing
- Raw Materials Inventories Contracting; Customers’ Inventories Too Low
- Prices Increasing; Exports and Imports Growing
From a technical standpoint, the markets are bumping up against several lines of resistance. It is not unusual for the market to take a breather or to have some bouts of short-term volatility and pullback when facing this setup. We believe that the backdrop will remain constructive for the appreciation of risk assets such as stocks, commodities, and real estate over the cyclical horizon.
Against this backdrop, several of the committee members are looking at adjusting their model portfolios that would align them with the above economic outlook. This would include shortening bond maturities in the face of potentially rising interest rates and inflation. There may also be a higher allocation to value stocks which have lower prices than their growth brethren and would benefit from an accelerating economy, more international stocks which could benefit from a falling dollar, exposure to commodities which would benefit from increased demand for materials and supplies, and a potential to look at alternative assets that are not correlated to volatility in either the stock or bond markets. For clients in our discretionary models, you will see trade confirmations come through as adjustments are made.
Final Takeaway
The committee continues to work hard to meet the investment accumulation and income needs of our trusted friends and clients. We appreciate your confidence and support. As always, should you have any questions, please do not hesitate to reach out to your advisor.
Should you have any questions regarding these notes, please do not hesitate to contact Kevin at (678) 401-6102
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*Past performance does not guarantee future results.
*Investments in securities do not offer a fix rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No System or financial planning strategy can guarantee future results.
Members of the Horizon Advisor Network Investment Committee
- Jesse Hurst- Impel Wealth Management
- Clint Gautreau- Horizon Financial Group
- Kevin Myers- ATL Global Advisors
- Brian Toma- Freeman Heyne Toma Financial Advisors
- Joy Schlie- Freeman Heyne Toma Financial Advisors