Investors Ponder Stimulus Size as Rates Rise

March 1, 2021 at 12:20 pm 2 comments

Stock prices rose again last month in part based on passage optimism of a government stimulus package (currently proposed at $1.9 trillion). But the rise happened before stock prices took a breather during the last couple of weeks, especially in hot growth sectors like the technology-heavy QQQ exchange traded fund, which fell modestly by -0.1% in February. As some blistering areas cooled off, investors decided to shift more dollars into the value segment of the stock market (e.g., the Russell 1000 Value index soared +6% last month). Over the same period, the S&P 500 and Dow Jones Industrial Average indexes climbed +2.6% and +3.2%, respectively.

What was the trigger for the late-month sell-off? Many so-called pundits point to a short-term rise in interest rates. While investor anxiety heightened significantly at the end of the month, the S&P 500 dropped a mere -3.5% from all-time record highs after a slingshot jump of +73.9% from the March 2020 lows.

Do Rising Interest Rates = Stock Price Declines?

Conventional wisdom dictates that as interest rates rise, stock prices must fall because higher rates are expected to pump the breaks on economic activity and higher yielding fixed income investments will serve as better alternatives to investing in stocks. Untrue. There are periods of time when stock prices move higher even though interest rates also move higher
Take 2013 for example – the yield on the benchmark 10-Year Treasury Note climbed from +1.8% to 3.0%, while the S&P 500 index catapulted +29.6% higher (see charts below).

Similarly to now, during 1994 we were still in a multi-decade, down-trending interest rate environment. However, from the beginning of 1994 to the middle of 1995 the Federal Reserve hiked the Federal Funds interest rate target from 3% to 6% (and the 10-Year Treasury yield temporarily climbed from about 6% to 8%), yet stock prices still managed to ascend +17% over that 18-month period. The point being, although rising interest rates are generally bad for asset price appreciation, there are periods of time when stock prices can move higher in synchronization with interest rates.

What’s the Fuss about Stimulus?

One of the factors keeping the stock market afloat near record highs is the prospect of the federal government passing a COVID stimulus package to keep the economic recovery continuing. Even though there is a new administration in the White House, Democrats hold a very narrow majority of seats in Congress, leaving a razor thin margin to pass legislation. This means President Biden needs to keep moderate Democrats like Joe Manchin in check, and/or recruit some Republicans to jump on board to pass his $1.9 trillion COVID stimulus plan. If the bill is passed as proposed, “The relief plan would enhance and extend jobless benefits, provide $350 billion to state and local governments, send $1,400 to many Americans and fund vaccine distribution, among other measures,” according to the Wall Street Journal.

Valuable Vaccines 

Fresh off the press, we just received additional good news on the COVID vaccine front. The U.S. Food and Drug Administration (FDA) approved the third vaccine for COVID-19 by Johnson & Johnson (JNJ). This J&J treatment is also the first single-dose vaccine to be distributed, unlike the other two vaccines manufactured by Pfizer Inc. (PFE) and Moderna Inc. (MRNA), which both require two shots. Johnson & Johnson expects to ship four million doses immediately and 20 million doses by the end of March.

So far, over 50 million doses of the COVID vaccines have been administered, and the White House believes they can go from currently about 1.5 million injections per day to approximately 4 million people per day by the end of March. The combination of the vaccines, mitigation behavior, and a slow march towards herd immunity have resulted in encouraging COVID trends, as you can see from the chart below. However, the bad news is new COVID cases, hospitalizations, and deaths still remain above peak levels experienced last spring and summer.

Revived Recovery

Thanks to the improving COVID trends, a continued economic recovery driven by reopenings, along with fiscal and monetary stimulus, business profits and revenues have effectively recovered all of the 2020 pandemic losses within a year (see chart below).

Source: Dr. Ed’s Blog

But with elevated stock prices have come elevated speculation, which we have seen bubble up in various forms. With the rising tide of new investors flooding onto new trading platforms like Robinhood, millions of individuals are placing speculative bets in areas like Bitcoin; new SPACs (Special Purpose Acquisition Companies); overpriced, money-losing cloud software companies; and social media recommended stocks found on Reddit’s WallStreetBets like GameStop (GME), which was up +150% alone last week. At Sidoxia Capital Management, we don’t spend a lot of time chasing the latest fad or stock market darling. Nevertheless, as long-term investors, we continue to find attractively valued investment opportunities that align with our clients’ objectives and constraints.

Overall, the outlook for the end of this pandemic looks promising as multiple COVID vaccines get administered, and the economic recovery gains steam with the help of reopenings and stimulus. If rising interest rates and potential inflation accelerate, these factors could slow the pace of the recovery and limit future stock market returns. However, if you follow a systematic, disciplined, long-term investment plan, like we implement at Sidoxia, you will be in a great position to prosper financially over the long-run.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (March 1, 2021). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in MRNA, PFE, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in GME, JNJ, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

Entry filed under: Asset Allocation, Behavioral Finance, Earnings, economy, Education, Exchange Traded Funds (ETFs), Financial Markets, Financial Planning, Fixed Income (Bonds), Government, Interest Rates, Interest Rates, Politics, Stocks, Trading. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , .

Market Drops as GameStop Pops Consumer Confidence Flies as Stock Market Hits New Highs

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