“Well…. we’re waiting…”
There’s a moment at the end of “Caddy Shack” where Judge Smails (Ted Knight) tells Danny Noonan, “Well…. we’re waiting” on the last green as Danny prepares for the (spoiler alert) winning putt.
Markets are always waiting for something. Months ago, it was a ramped up vaccination schedule and a smooth transition of the presidency. We got both but neither started so smoothly. Now, though, in my opinion, the government is working as smoothly as normal…. whatever that means…and SARS-CoV-2 is fading very quickly in all the places with high vaccine rates and at a good clip, collectively, across the country. The tragedy of some of the poorest parts of some countries remains shocking as new positive cases remain elevated. Using India as an example, even there, reported cases, hospitalizations, and deaths are declining.
There are so many questions still about SARS-CoV-2, including details about its leap to humans, whether mutations will overcome the dominant vaccines’ effectiveness and how long our antibody response stays vital. So, we wait…while scientist and policy makers work and study.
Maybe the newest, most unanswered question is whether the reawaking economy will create an ever-increasing level of inflation…or will the current moment’s inflation be elevated but temporary. (The bond market has voted on the latter for now.)
Of course, if inflation does keep moving higher, lenders, at some point, will insist on being paid an interest rate that compensates them for that risk. The current yield on 10-year treasuries is 1.4%. That is clearly below current inflation statistics. And similarly dated rates around the world are generally even lower. As we all know, money market and checking account interest earnings are essentially nothing. Total money market levels, as measured by the St. Louis Federal Reserve, averaged around 2.8 trillion for the last decade, but as of the end of Q1, 2021, stood at 4.5 trillion…. which is probably about where they are now.
What are these lenders (dollars lent to various institutions and government entities) waiting for? What will settle the minds of individuals and institutions such that they move cash and money market funds into assets with a much better prospect of beating the current inflation rate? Might some version of that same migration happen with longer-dated bonds?
As of the end of the 1st quarter, 2021, the total US stock market was worth $49 trillion dollars. The total outstanding treasury securities amount on March 31, 2021 was $28.1 trillion…. which includes intergovernmental holdings of $6.15 trillion. As of the same quarter end, US corporate debt totaled $10.5 trillion. (The total value of US commercial real estate exceeds $10 trillion. At the end of 2020 the (net) value of every home in the US was $33.6 trillion.)
The worry for asset managers is that history will show that re-allocation away from equity and real estate investing into lending for yield can happen. Does happen. Still, the question must be why it would happen anytime soon. Wouldn’t interest rate yields need to be quite a bit higher to entice money out of stocks and real estate, when current, fixed-rate yields remain below inflation?
The money in fixed yields—even at near zero—is waiting for something. And it’s been waiting for lots of different, potentially negative things for longer than just the dramatic and tragic many months of COVID. My guess is that it’s really waiting for the more obvious versions of ‘all clear.’ For us contrarians, the all-clear signals will most likely coincide with more fully valued real estate and equity markets…. where we become more conservative and careful. While we consider ourselves to always be careful allocators of client assets, ‘all-clear’ and ‘raise more cash’ have similar rings.
In markets, bell-ringing inflection points are just not real events. In fact, it’s the opposite. Attributed to Nathan Rothschild (in 1810), the saying “buy on the sound of cannons and sell on the sound of trumpets” is a version on contrary thinking and useful for asset allocation. While the cannon fire of harsh electioneering and the (too) slowly fading of SARS CoV-2 continues, the trumpeting of success and bliss is still quite feeble…. (and never really achievable anyway).
We are your professional asset allocators and financial planners. We’re patient often but even that is a conscious decision. What we are not is idle waiters. There’s always something to do…. for you.
Please let us know what’s on your mind including any of your concerns or needs. We’re at your service.
Any opinions are those of Bob Carson and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not indicative of future results.
Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.