CAMS Weekly View from the Corner – Week ending 2/26/21
March 1, 2021
Coming into 2021 our in-house market landscape view placed the bond market at the epicenter of our market diagrams. All roads led to the bond market with an overriding question of whether it could hold itself together as 2021 unfolded.
The obvious “screaming off the table” follow-on question was if it couldn’t would other markets – in particular the stock market – be able to hold itself together. Most of our Weekly Views this year have brought the bond market into the discussion underlining our 2021 focus on that market.
Rising interest rates can be a problem. Rising interest rates with historical off-the-chart stock market valuations (our current day reality) can be a serious problem. Rising interest rates with a D.C. backdrop of massive newly created indebtedness and money printing as an on-going policy approach nearly assures a problem in the bond market and through this, in time, given enough bond market upheaval will spill over to the stock market.
If you digest the previous paragraph you begin to see the potential of a negative feedback loop. That which created the initial concern in the bond market – money printing/indebtedness – can become viewed by the bond market not as a one-off fix but rather as an on-going policy approach and with this more concern is built into the bond market. Enough of this loop can bleed over to real issues in the highly valued stock market.
The Banker/Bond Market Analogy
The above bond market reality would be analogous to me walking into a banker’s office with a highly levered balance sheet (think lots of existing debt) emphasizing that another loan is necessary. Said banker looks at me sideways baffled that I would even entertain such an idea while they offer the obvious question: “How do you plan on servicing all your current debt let alone the new debt you are requesting?” Reply: “Any revenue shortfalls I experience will be met with additional debt financing as well as my printing press of which I can print “Ken Reinhart Dollars” as needed.”
Rather than adding comfort this horrifies the banker realizing I am planning on more debt to fix what ails me while also inflating my money supply, and in turn, making said dollars worth less and with this will be servicing my loans in an ever worth less currency.
Their minimum kneejerk reaction: “We will need a much higher interest rate to compensate for the additional debt burden that you are adding to your already highly levered balance sheet and to also compensate for the expected inflation pressures in light of your printing press plans.”
Obviously I am the government and the banker is the bond market in the above analogy. The key is the banker’s view of needing a much higher interest rate to essentially compensate for the various risks I bring to the table. That is, too much existing debt, too much expected new issuance debt and too much expected inflation resulting from the extreme money printing.
To offset the risk, a much higher interest rate is needed and in bond world that means bonds get sold resulting in a lower price and higher interest rate. This is the bond market’s dilemma in our current environment.
Meanwhile, the stock market looks over at the bond market nervously questioning, on a forward thinking view, just how much are you going to raise those interest rates? If those rates are going a lot higher we too will have to reassess our current stock pricing in light of the extreme historical valuation levels we are currently carrying.
The Q’s Are Offering Concern
In trading parlance the NASDAQ 100 is often referred to as the Q’s. The NASDAQ 100 is an index of the 100 largest companies on the NASDAQ. QQQ – The Q’s – is a trading symbol for a very large trading vehicle representing said index. Simply put, they are struggling.
The above chart is a one year chart depicting the Q’s. The blue line is a 50 day moving average line while the red is a 200 day moving average line. Moving averages simply average out the prices over the previous 50 or 200 days and update with each passing trading day – hence moving average. If prices cannot stay above the average price of the previous 50 trading days then you know an uptrend is in question.
Pricing action in this important area of the stock market is falling over. At this point now, it is appearing it wants to hold below the blue line (50 day MA) eliciting the question is it on its way to the red line (200 day MA) on a trend basis. The Q’s have been a market outperformer for quite awhile now. Historically, leadership falling over is rarely a good near-term sign for the overall stock market.
Bond market struggles are bleeding over to the stock market. If bond market pricing continues trending down it will surely place additional pressure on the stock market. The bond market remains at our epicenter for market guidance.
I wish you well…
Director, Market Research & Portfolio Analysis
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.