by Bryan Perrry

March 9, 2021

The most important data point for stock market investors now is the yield on the 10-year Treasury Note. How it trades up or down determines the response of the algorithmic trading programs as they adjust to the short-term direction of the equity markets. A poorly received 7-year Treasury auction is the culprit to the recent volatility – it revealed much about just how sensitive investor sentiment is to rising rates.

Seeing the benchmark yield adjust from 0.90% on January 1 to last week’s close at 1.55% shouldn’t be considered out of the ordinary, considering the more optimistic view of the economy, but the speed at which the yield rose did not sit well. The 5-year chart of the 10-year yield (below) shows some technical resistance here, then vulnerability to an extended move up to 1.90% if future bond auctions fare poorly.

Ten-Year Treasury Note Index Chart

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

Today, the Treasury will auction off $58 billion in 3-year Notes, then $38 billion in 10-year Notes on Wednesday, then $24 billion in 30-year Bonds on Thursday, as well as 10-year TIPS on Thursday.

Of the four auctions, I imagine the 10-year TIPS will be vastly oversubscribed. Investors are hearing more about inflation and this week’s reading on the February Consumer Price Index (0.4% consensus estimate) and Producer Price Index (0.6% consensus estimate) will be just as closely watched as the bond market’s reaction to the various auctions. Similar to the year-over-year earnings comps, next week’s inflation data will appear much stronger at first glance, considering the depressed levels at this time last year.

The problem a lot of market pundits fear is that Fed Chairman Powell and his colleagues are going to fall behind the curve, painting themselves into a corner. Powell’s stated fiscal QE goal is still coming at the rate of $120 billion per month. Fed officials have made it clear that they won’t be raising rates anytime soon and that the Fed isn’t going to be cutting back on its asset purchases for the balance of 2021.

The Fed might be empathically holding the line on its list of current policies, but it’s what the market thinks that ultimately matters, and Powell shouldn’t be “playing chicken” with the bond vigilantes. (For those not familiar with this term, economist Ed Yardeni coined the term “bond vigilantes” in the 1980s, referring to investors who sell bonds in protest of monetary policies, thereby driving up yields.)

The Fed should not provoke this crowd. They make the Wall Street Bets community look like child’s play by the size and scope of the influence they have on both the bond and stock markets, both here and abroad. The persistence of low, long-term rates has been driving asset inflation for years, and the Fed made known to the investing world their willingness to be flexible amid rising inflationary conditions.

It’s not that the Fed won’t use its toolbox to tamp down long-term yields if they start to get disorderly. Rather, it is Chairman Powell’s unwillingness to discuss some of these options, such as utilizing “operation twist,” the selling of short-term Treasuries and buying of long-term Treasuries to flatten the curve and satisfy the market’s need for a Fed sensitive to inflation.

Powell labels the rise in inflation as “transitory,” meaning temporary, with limited staying power. During a Senate committee hearing last Wednesday, for instance, Powell said, “We could have a surge in spending as the economy reopens. We don’t expect that to be a persistent longer-term force, so while you could see prices move up, that’s a different thing from persistent high inflation, which we do not expect.”

Though consumer prices were up just 1.4% from a year ago in January, recent indicators – such as rising retail sales, durable goods purchases and service sector prices – have shown more inflation to be in the pipeline. The 5-year breakeven rate, an indicator of the bond market’s expectations for inflation, rose to 2.38% as reported last Wednesday – its highest level since before the financial crisis of 2008.

This line of thinking is what investors fear most in a recovery – that inflation is picking up from global supply/demand dislocation in commodities and the service sector amid week-to-week upward revisions for GDP growth. The latest employment report added fuel to the case for the Fed to start discussion of a forward response plan, in the event that both inflation and economic data trend persistently higher.

Come this time next week, with a few more Treasury auctions over and key inflation data having crossed the tape, investors should have a better idea of whether the bond market overreacted or the current rotation out of Treasuries is warranted. The bigger question is whether the stock market can successfully transition to higher earnings growth and higher rates. History is resoundingly on the side that it will.

It may also be instructive to look at some historical examples of rising interest rate environments.*

  • From 1954 to 1960, the 10-year Treasury yield went from 2.3% to 4.7%. In that time, the S&P 500 was up 207% in total return (17.4% annualized).
  • From 1993 to 1994, rates shot up from 6.6% to 8.0%. The S&P 500 was still up nearly 12%.
  • At the tail-end of the dot-com bubble, rates rose from 5.5% in 1998 to 6.5% in 1999. Stocks were up more than 55%.
  • From 2003 through 2007, rates went from 3.3% to 5.1%. The S&P rose nearly 83% (12.8% annualized).
  • The latest rising rate environment saw the 10-year rate go from 1.5% in 2012 to 3% by 2018. Even with the mini-bear market at the end of 2018, stocks were still up 131% in total.

*Source: www.awealthofcommonsense.com

The stock market generally holds up well when rates are rising. EconomPic ran the numbers on what happens to various segments of the U.S. stock market historically when rates rise 1% or more during a 10-year span – during a 20-year span including the 1999-2000 dot-com bust and 2008-09 Great Recession.

Cumulative Annualized Performance Bar Chart

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

Surprisingly, Growth stocks beat Value in large-, mid- and small-cap stocks when rates have risen in the 20-year period covered here. Hail, to growth stock investing!

 

The issue now is that interest rates have never come up off such a low level (zero), and federal stimulus has been a constant source of sugar for stocks. How the market handles this will be known soon enough, but rising rates, in and of themselves, have not prevented the long-term bull market from marching on.

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

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
Extreme Divergence in the Gold Market

Sector Spotlight by Jason Bodner
Fight Fear with Superior Market Research

View Full Archive
Read Past Issues Here

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

Important Disclosures:

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not a solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.To the extent permitted by law, neither Navellier & Associates, Inc., nor any of its affiliates, agents, or service providers assumes any liability or responsibility nor owes any duty of care for any consequences of any person acting or refraining to act in reliance on the information contained in this communication or for any decision based on it.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report. Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The holdings identified do not represent all of the securities purchased, sold, or recommended for advisory clients and the reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for every investor. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Index is unmanaged and index performance does not reflect deduction of fees, expenses, or taxes. Presentation of Index data does not reflect a belief by Navellier that any stock index constitutes an investment alternative to any Navellier equity strategy or is necessarily comparable to such strategies. Among the most important differences between the Indices and Navellier strategies are that the Navellier equity strategies may (1) incur material management fees, (2) concentrate its investments in relatively few stocks, industries, or sectors, (3) have significantly greater trading activity and related costs, and (4) be significantly more or less volatile than the Indices.

ETF Risk: We may invest in exchange traded funds (“ETFs”) and some of our investment strategies are generally fully invested in ETFs. Like traditional mutual funds, ETFs charge asset-based fees, but they generally do not charge initial sales charges or redemption fees and investors typically pay only customary brokerage fees to buy and sell ETF shares. The fees and costs charged by ETFs held in client accounts will not be deducted from the compensation the client pays Navellier. ETF prices can fluctuate up or down, and a client account could lose money investing in an ETF if the prices of the securities owned by the ETF go down. ETFs are subject to additional risks:

  • ETF shares may trade above or below their net asset value;
  • An active trading market for an ETF’s shares may not develop or be maintained;
  • The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track;
  • The cost of owning shares of the ETF may exceed those a client would incur by directly investing in the underlying securities; and
  • Trading of an ETF’s shares may be halted if the listing exchange’s officials deem it appropriate, the shares are delisted from the exchange, or the activation of market-wide “circuit breakers” (which are tied to large decreases in stock prices) halts stock trading generally.

Grader Disclosures: Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. The sample portfolio and any accompanying charts are for informational purposes only and are not to be construed as a solicitation to buy or sell any financial instrument and should not be relied upon as the sole factor in an investment making decision. As a matter of normal and important disclosures to you, as a potential investor, please consider the following: The performance presented is not based on any actual securities trading, portfolio, or accounts, and the reported performance of the A, B, C, D, and F portfolios (collectively the “model portfolios”) should be considered mere “paper” or pro forma performance results based on Navellier’s research.

Investors evaluating any of Navellier & Associates, Inc.’s, (or its affiliates’) Investment Products must not use any information presented here, including the performance figures of the model portfolios, in their evaluation of any Navellier Investment Products. Navellier Investment Products include the firm’s mutual funds and managed accounts. The model portfolios, charts, and other information presented do not represent actual funded trades and are not actual funded portfolios. There are material differences between Navellier Investment Products’ portfolios and the model portfolios, research, and performance figures presented here. The model portfolios and the research results (1) may contain stocks or ETFs that are illiquid and difficult to trade; (2) may contain stock or ETF holdings materially different from actual funded Navellier Investment Product portfolios; (3) include the reinvestment of all dividends and other earnings, estimated trading costs, commissions, or management fees; and, (4) may not reflect prices obtained in an actual funded Navellier Investment Product portfolio. For these and other reasons, the reported performances of model portfolios do not reflect the performance results of Navellier’s actually funded and traded Investment Products. In most cases, Navellier’s Investment Products have materially lower performance results than the performances of the model portfolios presented.

This report contains statements that are, or may be considered to be, forward-looking statements. All statements that are not historical facts, including statements about our beliefs or expectations, are “forward-looking statements” within the meaning of The U.S. Private Securities Litigation Reform Act of 1995. These statements may be identified by such forward-looking terminology as “expect,” “estimate,” “plan,” “intend,” “believe,” “anticipate,” “may,” “will,” “should,” “could,” “continue,” “project,” or similar statements or variations of such terms. Our forward-looking statements are based on a series of expectations, assumptions, and projections, are not guarantees of future results or performance, and involve substantial risks and uncertainty as described in Form ADV Part 2A of our filing with the Securities and Exchange Commission (SEC), which is available at www.adviserinfo.sec.gov or by requesting a copy by emailing info@navellier.com. All of our forward-looking statements are as of the date of this report only. We can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially. You are urged to carefully consider all such factors.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE:The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades.  Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report.

FactSet Disclosure: Navellier does not independently calculate the statistical information included in the attached report. The calculation and the information are provided by FactSet, a company not related to Navellier. Although information contained in the report has been obtained from FactSet and is based on sources Navellier believes to be reliable, Navellier does not guarantee its accuracy, and it may be incomplete or condensed. The report and the related FactSet sourced information are provided on an “as is” basis. The user assumes the entire risk of any use made of this information. Investors should consider the report as only a single factor in making their investment decision. The report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. FactSet sourced information is the exclusive property of FactSet. Without prior written permission of FactSet, this information may not be reproduced, disseminated or used to create any financial products. All indices are unmanaged and performance of the indices include reinvestment of dividends and interest income, unless otherwise noted, are not illustrative of any particular investment and an investment cannot be made in any index. Past performance is no guarantee of future results.