February saw stock markets regain their footing, as optimism over vaccinations, stimulus, and loose monetary policy propelled markets higher. The S&P 500, a broad measure of the stock market, was up nearly 3%, and small-company stocks rose even more. Volatility crept back into stocks late in February, and has continued in early March, as rapidly rising interest rates have surprised the market.
Even though the Federal Reserve has indicated that it will keep short-term rates low, longer-term rates have moved higher. This is because long-term rates are more heavily influenced by bond-investor behavior. Bonds trade on exchanges like stocks do, so investor activity controls bond prices from day-to-day. When bond investors sell their holdings, or reduce their buying, bond prices will ordinarily fall. This, in turn, pushes interest rates higher. We’ve seen that on display since about July of last year. Over that period, there have been fewer bond buyers (or more bond sellers), and long-term interest rates have moved higher.
One of the primary reasons for this is changed inflation expectations. A year ago, bond buyers were happy to buy a 10-year U.S. Treasury that yielded less than 0.40% interest per year for 10 years. At the time, growth and inflation prospects didn’t look too great, so bond investors were satisfied with lower potential returns. Today, though, growth prospects look much better, especially given all of the economic stimulus being provided. So, bond buyers are demanding higher interest rates, giving us a clue about where the economy is headed. In fact, many market analysts believe you can learn more about the future of the economy form the bond market than from the stock market. If this is the case, we’ll be in for much more robust growth, and possibly inflation, than was expected a year ago.
We’ve also seen an acceleration of the rotation out of technology and other “work-from-home” stocks into stocks that are more associated with economic reopening. I think we’ll continue to see that rotation, so while I’m not abandoning technology stocks, we are placing renewed interest into reopening stocks. My expectations are for continued gains for stocks in 2021, with the customary pauses mixed in throughout the year. Given our current outlook, we’ll be using pauses or pullbacks as buying opportunities.
In the meantime, April 15 is rapidly approaching, so don’t forget to complete your income-tax filings by then. Also, April 1 is the deadline for taking RMDs from IRAs if you turned 72 last year and delayed your first distribution. Our last upcoming date to remember is Good Friday, April 2. The stock market will be closed that day, and so will our offices.