by Bryan Perry

March 2, 2021

The past two weeks have proven to be turbulent for most asset classes, save for a few widely traded commodities like lumber, copper and oil. Heading into the final two trading days of February, bonds, gold and high P/E growth stocks all got crushed. Even Bitcoin shed 25% in its worst week in a year. The first two months of 2021 have been a wild ride, but a bullish one for those that can withstand huge price swings amid bouts of risk-off trading. That ride stalled out, at least temporarily, as the dollar stabilized.

Treasury Secretary Janet Yellen also poured cold water on cryptocurrency with her comments: “I don’t think that bitcoin…is widely used as a transaction mechanism,” she told CNBC’s Andrew Ross Sorkin at a New York Times DealBook conference. “To the extent it is used, I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering.” Not quite the endorsement Bitcoin fans were looking for.

Coindesk GraphGraphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Diverting away from cryptocurrencies, Reddit short-squeezes and central bank manipulation of the dollar, euro, yen, pound sterling and yuan, there are forces outside the power of the Fed, other central banks, Congress, the IMF, EU and other influential global bodies of authority, that are out of their control, namely the global supply and demand curve of key commodities and the direction of the long end of the yield curve. Sure, the Fed may have a lock on holding short-term rates at or near zero, but the spike in the long end of the curve – the 10, 20 and 30-year maturities – trades on its own and has investors up at night.

30 Year Treasury Bond (STYX)

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

But, as with any economic recovery, interest rates and bond yields rise. Historically, it’s been a bullish development for stocks because the earnings rebound fueling the “risk on” appetite typically far exceeds that of the “risk off” fear of rising rates, and the market has to transition to this unfolding landscape.

To what extent inflation is being anticipated is the big question being asked this past week. The Fed’s goal of a 2% core inflation rate is being realized quickly, but at what point does $60 oil take gas prices north of $3 per gallon, or at what point does a sky-high lumber price, or roofing and other building material prices slow the pace of new construction in places like San Diego to a crawl as profits evaporate in an already super tight housing market where land acquisition costs are at a big premium?

Like it or not, investors are on commodity watch. I posted this same table of select commodity prices on February 9. In just the last three weeks, there are big spikes in the prices of crude oil, gasoline, heating oil, ethanol, palm oil, rubber, coffee, lumber, oats, cotton, cocoa, sugar, lean hogs, copper, lithium, platinum, steel, cobalt, aluminum, tin, nickel, molybdenum, iron ore, soda ash and rhodium.

Commodity Index

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

These three main commodity indexes are up an average 11.7% in the last month. The CRB Index closed out last week at 202.37 marking the highest level in a year, but in all reality, it only returned to normal levels prior to the pandemic. While certain select commodities like lumber are hitting new lifetime highs, most others are reverting back to previous levels prior to the global economic fallout from COVID-19.

CRB Index (Index Points)

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This observation might tell us why the Fed sees the current wave of inflation as “transitory,” where the pace ebbs in the months ahead, as more supply comes online to address various shortages, but there is little doubt that the next set of inflation-related figures to be released the week of March 8 will again show a rise in core and non-core inflation, and the bond market may once again react negatively.

With that said, any fears of “hyperinflation” being fanned by some market bears seems overblown, at least at this time, until a longer pattern of price increases has been established. The hyper gains in technology will still act as a deflationary counterforce. We’ll need to see these spiking hard and soft commodity prices start to cool, going forward, to take some of the steam out of the inflation data.

Commodity Index1

Commodity Index2

Commodity Index3

Commodity Index4

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In my view, the angst being exhibited by the market is overdone. The reflation trade and worldwide vaccine rollout is lifting most all boats. Since the stock market lives and breathes the direction of the U.S. 10-yr T-Note, it bears laying out where the inflection points are – which are pretty clear from this chart.

10 Year Treasury Note ($TNX)

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The first resistance level of 1.5% has been breached, and the market had a hissy fit, even as the Atlanta Fed raised its Q1 GDP forecast to 9.5%. Why in the world would anyone not think bond yields wouldn’t tick higher with a GDP forecast this bullish being floated? High-flying stocks had to reset, but the market should absorb this initial pop in yields and head higher on brighter earnings prospects.

The next level round number of 2.0% will likely be challenged in the not-too-distant future as stronger employment data starts to cross the tape from widespread hiring within hotels, resorts, restaurants, bars, casinos, airlines, cruise lines, amusement parks, professional and collegiate sports venues, live concerts, movie theatres, live theatres all come back to full employment and operational capacity.

An additional move higher to 2.5% for the 10-year could simply result from a continuation of good things happening in the economy over the next three to four months in conjunction with initial and weekly stimulus checks going out, another whale-sized round of PPP loans being issued to small businesses, improving Covid data and more government spending in the form of a massive infrastructure package.

A move to 2.5% will also imply the bond market expects the Fed to yank forward its plans to taper QE. Considering that we’re only talking about a move higher of just 1.0% from current levels, that’s not much interest rate risk when one considers the equity rewards.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
Bonds Offer No Real Competition to Stocks

Income Mail by Bryan Perry
Staying the Course Amid the Volatility

Growth Mail by Gary Alexander
The Case for a Rapid Economic Rebound in 2021

Global Mail by Ivan Martchev
The Fed Would Love a 2% 10-Year Treasury

Sector Spotlight by Jason Bodner
Is the Stock Market Beginning to Crack?

View Full Archive
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About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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