The last week or two have been like a roller coaster ride – up, up, and up, then down, back up, and back down again. The S&P 500 and Dow were back near all-time highs by the middle of the week, only to end the week in negative territory. For the week, all the major averages were down:
The wild swings can certainly feel unsettling. However, market gyrations are a normal part of investing. There is nothing to be too concerned about. After all, we have been expecting this pullback and still anticipate the markets need to let off even more steam because they are running “too hot.”
The main reason stocks have been down this week is rising fixed income/bond yields. A rapid rise in Treasury yields, driven by concerns over inflation and higher borrowing costs, spooked investors out of stocks. The 10-year Treasury yield hit a brand new one-year high, near 1.6%. If you remember, the yield had fallen to an all-time low of .31% during the pandemic. Because yields have gone up so much, so quickly, this movement has created investor nervousness.
If we peel back a layer of the onion, we can see that higher growth expectations and higher inflation expectations are the main catalyst bending higher interest rates. The reality is that interest rate yields were far too low, when factoring in the continued economic recovery from COVID-19.
Interest rates should continue to track higher in the coming months, as economic data continues to improve. This is good news, because a healthier economy should have higher interest rates.
In our opinion, fears over a higher-rate environment are overblown. If history is any guide, stocks rallied during 13 of the past 16 rising interest rate environments (Eric Diton, Yahoo Finance). Although fixed income continues to gain favor, in our eyes, stocks still represent the best opportunities for investors moving forward.
If we look at the bigger picture, the markets have gotten off to a great start in 2021, hitting multiple new highs over the past several weeks. Fourth quarter earnings were stellar, and that helped send stocks higher. Now that there is a lag in fresh data to drive stocks higher, they are taking a normal breather.
The next several weeks could see more of the same. We expect the markets to drift sideways or even lower in the coming weeks. This represents an amazing buying opportunity. During these periods of weakness, it is a good time to get any money off the sidelines and into the markets.
By mid-March, stocks should be back off to the races. As we near the end of the first quarter, there tends to be a wave of buying from pension funds and institutional investors. We expect this to provide a boost to stocks heading into the end of March. Then, come April, we’ll see the first quarter earnings season, which we anticipate being excellent.
The market is full of highs and lows, just like many other things in life, our spiritual journeys included. Romans provides guiding words on not letting such down days get the best of us:
With the ups and downs in the market, it is always better to stay grounded than act on emotion. Our team continues to tune out the distractions around the market and, instead, remains focused on the prize of finding some of the best opportunities in the market.
Sources: Yahoo Finance, Reuters.com, and JP Morgan Market Insights
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