March Outlook: Fed Focused With New Fiscal Stimulus Helping To Boost Yields

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Key points to remember:

  • Congress could grab headlines amid new stimulus campaign
  • Rising yields cut off the burgeoning tech market, but cyclicals gained momentum
  • March Fed Encounters Another Chance For Powell And Company To Assess Inflation Table

After a frosty February, March soon begins with a hint of spring in the air. And stimulus notes.

As the new month dawns, attention turns to Capitol Hill, where Congress is expected to provide an additional $ 1.9 trillion in stimulus (roughly 100 billion) before baseball’s regular season first hitter passes. to marble. After December stimulus checks apparently contributed to a retail sales increase of more than 5% in January, there is optimism that if a small stimulus helps the economy, perhaps a bigger stimulus will help. more.

In addition to watching the political sausage unfold, investors will likely have their eyes on the Fed as it prepares for a meeting in the middle of the month. There’s also vaccine advancement, a bunch of corporate investor days, and even a handful of profits despite the main season ending in February. Top company results to watch in March include Target
TGT
(TGT), FedEx
FDX
(FDX), Oracle
ORCL
(ORCL), Video zoom (ZM), Kohl’s
KSS
(KSS), Broadcom
AVGO
(AVGO) and Nordstrom
JWN
(JWN).

As always, keep an eye on the data. Especially employment. The latest Department of Labor payroll reports are nothing out of the ordinary. Ditto for new weekly unemployment claims. The Fed says the recent pandemic surge has weighed on job creation. The question is whether the recent declines in cases could get job growth back on track over the next two months. Also watch the March 1 ISM manufacturing report to see if the surge in that sector of the economy continued into February.

The model so far: no model

With the first two months of 2021 almost behind us, there really hasn’t been a firm pattern established in the stock market. Technology rallied and then faltered, with Apple
AAPL
(AAPL) and Tesla
TSLA
(TSLA) resembling punching bags soon after hitting all-time highs. Sometimes we get the impression that there is a shift from growth to value, or to so-called “reopening” actions in the energy, financial and industrial sectors, but it can depend on the day we are. The major indices are up about 2% since the start of the year in late February, but well below their 2021 highs.

Still, fixed income and commodities continue to point to an economic recovery, as does strength in sectors like energy, which have been beaten most of the past year. Cases of the virus around the world began to decline in February, vaccinations soared, and investors continued to look for new places beyond the popular stock market to place their money. Bitcoin continues to climb, reaching new highs above $ 52,000 in late February.

At the end of the day, rates are still historically low and there is a lot of money flowing around looking for a home. Up to $ 5 trillion is in money market funds, mostly collecting dust, according to a recent media report.

Speaking of rates, one of the themes for February that could spill over into March is some sector rotation, as higher bond yields weigh on the big tech stocks that have carried things throughout the recent rally. Strong readings on January’s retail sales, industrial production and the producer price index – all released recently – gave the rally in yields another boost, and higher rates are often seen as a downside. weight on technology and other growth stocks. Recall at the end of 2018 how the tech market took a hit after returns hit multi-year highs.

Why Tech? Because the expected cash flows of businesses are considered less valuable when returns are higher. This poses a threat to many tech stocks as a large portion of their profits are expected to grow in the future.

Attention Performance Indicator Signals

We are of course far from having historically high returns. The 10-year yield topped 3% as recently as 2018 and 5% in 2007. The current yield between 1.3% and 1.4% would have been an all-time low before last year, but that’s the momentum of the rise that could be worrying investors in growth stocks. The 10-year yield has risen by around 40 basis points since the start of this year, a pace you don’t often see. And the yield curve, which is the difference between the 10-year yield and the two-year yield, is the highest since 2017.

One way to look at it might be that there has never been a time like this, with the economy emerging from a self-induced (well, pandemic-induced) recession. It was not a normal recession where demand started to drop or the financial markets went out of balance. Instead, we did it ourselves by shutting down the global economy. That, followed by central banks around the world immediately lowering rates to zero and grabbing bonds to drive yields down, caused historically low interest rates.

Now, if the pandemic really does start to recede, it’s hard to find any natural reasons for rates to be so low (aside from the fact that unemployment remains a major problem in the wake of the recession and may not be on the way. able to recover as quickly as the overall economy). On the other hand, the Fed has said it has no plans to end its $ 120 billion-per-month bond buying program anytime soon, and is forecasting the next rate hike not. in months, but in years. This could ultimately slow the rally in yields, but we’ll have to wait and see.

Which brings us to Fed policy. The next federal open market committee is approaching March 16-17, and the market is not expecting any rate changes. However, looking further ahead, there is a slight stir in what has been a very lackluster rate outlook for the past year. The federal funds rate has been in the target range of 0 to 0.25% since the early days of the pandemic, with little sign that it is heading anywhere anytime soon.

The federal funds futures market is starting to show signs of life. At the end of February, the CME Group
CME
The FedWatch tool predicted an 8% chance of a rate hike by June. While this is not a material probability, it is what we often see when the sentiment for rates begins to change. A few weeks ago, the futures markets valued a zero percent probability of any rate move in 2021.

It is currently 90% or more certain that rates will stay at zero, depending on the expectations of the futures market. That’s not to say the Fed is out of bullets. If the central bank is worried about overheating, it could most likely signal it by suggesting it is considering a slowdown in bond purchases. The Fed doesn’t need to specify a time or a date, only to say it’s on the radar, and it would likely slow the stock market down. Fear of this could play into market struggles in late February.

That said, it seems highly unlikely that the Fed will do anything so dramatic at its March meeting, given that the pandemic still has much of the country stranded. Recent weather conditions may also have adversely affected economic growth and vaccine distribution. Fed Chairman Jerome Powell, in his comments to Congress in late February, did not allude to any change in the central bank’s accommodative strategy. The Fed meeting is still two weeks away, so we’ll see if anything looks different by then.

Inject more optimism – literally

Vaccinations could be a good way to monitor the chances of the economy ebbing this spring, so to speak. About 63 million doses of the vaccine had been injected by the end of February, reaching 13% of Americans, the The Bharat Express News reported, and the pace is about to pick up. About 145 million doses have been set for delivery in the next five and a half weeks, the TBEN reported on February 22, with an additional 200 million at the end of May and 200 million at the end of July.

These figures don’t even include any contributions from Johnson & Johnson
JNJ
(JNJ), which could get approval for its single-dose vaccine in March. That approval, if it comes, could instill some optimism on Wall Street.

Right now, it looks like the stock market could use that optimism. Although the main indices remain close to their all-time highs, the end of February saw difficulties emerge. We have already talked about one of the reasons, which is that higher yields weigh on tech stocks.

Dogs Growth Stocks Contest

Higher yields could weigh in other ways as well. They could worry investors about rising costs of borrowing for consumers, which could dampen any recovery from the recession. Or people might worry about higher yields attracting investors to fixed income securities, where yields are still low but now more competitive with the yields of some of the so-called ‘bond proxy’ sectors like utilities and commodities.

This shift to fixed income or other places (like bitcoin) could explain why Tech struggled in late February. There might also be a small profit taking going on. It doesn’t necessarily mean that people are going into higher yielding investments, just that they see other areas of the market that they might want to get into after a nice two year period.

Remember, we’ve been here before. The Nasdaq 100
NDAQ
(NDX), which is dominated by the biggest tech companies, experienced rough September and October before picking up speed as the holidays approach. Technology has those kinds of stretches sometimes where things go wrong, but recent technology downturns haven’t lasted too long.

No one has gotten rich in fade technology the past couple of years, but we were recently at all-time highs and they had an amazing run. You need to take a step back from time to time.

TD Ameritrade® reviews for educational purposes only. SIPC member.

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