It’s hard to see the iceberg in calm waters

By David Nelson, CFA CMT

Searching for the next catalyst the S&P 500 drifted higher last week. The surprise had to be 10-year yields hitting the lowest level in 3 months on the heels of another hot inflation signal from Wednesday’s CPI numbers.

It begs the question what do bond investors see that equity investors are missing? Could the Fed be right that the inflation concerns are indeed transitory? Energy, food and other commodity-based inflation indicators can of course change on a dime, but wages are sticky.

Despite these concerns price is truth. 1.45% in 10-year yields is the lowest we’ve seen since the Q1 spike and benign yields almost always point to growth or long duration equity. The reopening trade has driven large cap value and small caps since the November Pfizer announcement of a vaccine in hand and are still the best performers this year but the headlines that growth is dead seem a bit premature.

Fund Flows

As we talked about in Thursday’s D2 show just about every asset class is showing positive inflows. With so much cash sloshing around investors seem little concerned with what they buy just so long as they buy something.

Bear Market Recoveries – 50 Years

We had a number of questions about the chart from Goldman’s strategy team we showed during our last show. It ranks the performance of all bear market recoveries since 1970. Eerily we are right on pace with the recovery coming out of the financial crisis both of which rank at the top for the last half century. The common denominator is of course the Federal Reserve and the flood of liquidity. Today we have an added factor in that there is massive fiscal stimulus to match monetary policy with no end in sight.

With rates looking like they would like to touch 1% before hitting 2% equities are still the better asset class. Unfortunately, this is not a new concept and just about every portfolio manager and talking head is singing the same toon. All the more reason to appreciate just how far stocks have come. Investors need to stay alert and always on the lookout. Icebergs are tougher to see when waters are calm.