The Unrelenting Fear Gauge

CAMS Weekly View from the Corner – Week ending 1/11/21

January 11, 2021

Welcome to 2021 or welcome out of 2020, which ever sounds better to you.  Out of 2020 is my preferred, as I believe it was the longest three years of my life.
 
As we begin the new year the stock market is generally calm and attempting to trend higher while the bond market – in particular the Treasury bond market – is anything but calm be it with the barrage of debt induced money printing of 2020 and promises of more to come into 2021 from the incoming Administration.
 
With the above, here in early January, the broad stock market is up a few percent and the longer dated maturities of the Treasury bond market are down a few percent.
 
A comparative down percentage of bonds to stocks is a big deal in the bond market as the longer dated maturities currently only register a yield of around one percent for 10 year maturities and just under two percent for the 30 year maturities. 
 
Basic math offers the expected yields are not covering the downdraft of the applicable bond price downturn thus far in the new year hence a few percent downdraft to bonds are a much bigger negative than what the converse celebratory tone of a few percent uptick are to stocks.
 
If the above narrative were to become a trend we have to seriously question how much stocks will be able to celebrate (even with the expected Trillions of new debt and printed money suggested this past Friday by the incoming President as shared here: https://tinyurl.com/y4s2bt3n) as they watch interest rates in the bond market trending higher.
 
As an aside, as bond prices move lower in trend this simultaneously increases their yield hence lower bond prices equals higher effective interest rates.
 
Realizing the economy has become addicted to ultra low interest rates it is an interesting forward thought experiment of how market participants would process, via stock market pricing, a backdrop whereby the indebtedness/money printing process adds more concern/selling in the bond market while simultaneously injecting Trillions into the economy.
 
You may think a doubling of the interest rate for the 10 Year Treasury of one percent up to two percent is not a big deal being it is still only two percent.  The rate of change (a hundred percent increase in the interest rate) is a big deal to an economic structure that has become addicted to the one percent backdrop. 
 
Keep in mind, as goes the 10 Year Treasury rate so goes many market based interest rates throughout the economy and that is where a notable change can become a drag on an already limping economy – virus discussions aside.
 
Importantly, this is not to suggest if the 10 Year Treasury doubled in yield that all interest rates would double.  Rather, the trend of rates is what is important as other rates would also be expected to move higher as the 10 Year Treasury does so.
 
With all of the above, it is interesting to observe the Volatility Index, which in slang is known as the Fear Gauge.  This measure continues to remain a bit stubborn in its registering north of twenty.  While this gauge has certainly come down a lot in recent months, historically north of 20 offers uneasiness. 
 
Keeping it simple why are the storm clouds hanging around – it is not raining but yet they remain.  The north of twenty Fear Gauge reading offers this as a market backdrop
 
With the calmness of the stock market in recent weeks the Fear Gauge has remained more elevated than one would think.  Upcoming weeks will shed additional information on this front as well.  If it continues to hold relatively high it may be offering some concern levels beyond what the consensus is feeling relative to the stock market.
 
We will be watching all of the above and more and will share accordingly as we move through 2021.  Welcome to the New Year or welcome out of the old one – whichever works eh!
 
I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.