Bond Market Temper Tantrum

Bond yields rose substantially in February as a combination of slowing COVID transmission rates, widespread vaccine rollouts, and expected government stimulus measures boost investor optimism that a full economic reopening is on the horizon.

Perversely, all the positive news and economic enthusiasm sparked renewed volatility. Markets seem to be contemplating the likelihood that higher interest rates and/or inflation are incoming.

Our Perspective

Rising interest rates will pressure near-term performance for bond market investors, but they may also act as a headwind on stocks too. In general, markets see higher yields as making bonds more attractive versus stocks, potentially sparking some investors to rotate out of equities and into fixed income.

While the volatility may be surprising, it’s important to not get too caught up in short-term market moves. Sentiment on everything from interest rates and inflation, to the entire market as a whole, will wax and wane over time.

In today’s highly dynamic market, we believe a balanced approach to asset allocation remains appropriate, and we are continuing to tactically take advantage of opportunities as we see them.

Gamifying the Stock Market

GameStop shares were the big story last month, and the situation continues to evolve. Internet traders joined together to bet against short positions held by hedge funds and other institutional investors, triggering a short squeeze.

This meant the struggling video game retailer saw its share price jump by orders of magnitude in days, on little fundamental news, causing sizeable losses for those who held short positions in the stock.

Although its share price has since normalized to some degree, the stock remains highly, highly volatile—and as recently as last week, GameStop saw a near 100% rebound in its share price in one day alone.

Our Perspective

Short squeezes have happened before, and the effect on the broader financial system is negligible.

With that said, social networking and today’s low trading costs are creating a new normal in financial markets. Casual traders easily able to band together and make an outsized impact on stock prices.

Although moves like these can create a sense of FOMO (aka. fear of missing out), successful investing for the long-term is about fundamentals, not short-term trades.

For more, check out our recent blog post, Gamestop, Day Trading, and Speculation.

Striking Gold

In times of market stress, investors often look to gold as a safe haven. While it no longer backs the US financial system, gold remains a popular investment.

Gold prices tend not to fluctuate with moves in stocks and bonds, which can help investors diversify their portfolios, and it has historically provided downside protection during volatility.

Our Perspective

We are always monitoring gold for its investment potential, and we closely follow key indicators including money supply growth, inflation, and real interest rates.

It is important to consider these factors, supply and demand dynamics, and more, when analyzing the attractiveness of gold, and we now believe that current financial conditions favor a position.

For more, check out our recent blog post, The Value of Gold in a Portfolio.

Our View
Economic Cycle		The US is in the early stages of the economic cycle, although the recovery has been slowed by a resurgence in cases; additional fiscal and monetary stimulus measures will play a key role in dictating the speed at which economic activity, business confidence, and consumer confidence normalize
Stock Market		The US stock market is well past pre-pandemic levels and, valuations are broadly elevated; market volatility has risen as markets grapple with the potential impact of higher interest rates and inflation
Bond Market		While off their lows on the long-end, interest rates still remain very low in general, both domestically and abroad; corporate and municipal bond credit spreads have tightened back to pre-pandemic levels and are near historic lows
Foreign Exchange		While we believe the dollar may weaken longer term, in the short-term, it is difficult to make the argument that currencies will swing significantly
Important Issues on the Radar		COVID-19: recent flare ups in the US and Europe have resulted in Europe re-imposing strict lockdowns and the US seeing rolling restrictions, with each acting as headwinds to the economic recovery Trade Tensions: relations have been in decline for some time, and while we expect the Biden Administration to be less aggressive, the long-term trend will remain in place US Politics: the transition of power was noisy and further highlighted how divided the country is, which, combined with very slim Democratic Congressional margins, suggests that the status quo is likely to persist Inflation vs. Deflation: the significant demand shock makes it hard to call for inflation, but the sheer size of fiscal and monetary programs around the world should be a cause for concern

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All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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