Broker Check


| March 01, 2021
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February was action-packed.  There was dramatic volatility in just about everything.  And most of it was negative, except for Bitcoin which, in a perverse way, seems to be becoming a hedge against all more traditional assets, including gold.  All had a tough month.

Bond yields led the way as the 10-year US Treasury bond yield rose from 1% to 1.4%. Since bond prices decline when yields rise, bond portfolios were hit hard.  TLT, the ETF for long-term Treasury bonds, declined from 154 to 138 - a decline of some 10% on an investment that started the month yielding less than 2% per year.

Not surprisingly, the QQQ, the ETF dominated by large-capitalization NASDAQ stocks like Apple and Microsoft, had a difficult month.  As we have said, large growth stocks are among the longest duration assets you can buy.  As bond yields rise, their price/earnings valuations decline.  Earnings for these companies are great, but P/Es declined such that the index declined about 5% in a month.

Bond yields rose despite assurances by chairman Powell of the Federal Reserve that they have no intention to raise short-term rates or reduce their bond purchases until it is absolutely clear that full employment and inflation above 2% has been achieved. 

So, the market is doing the job for them.  The market senses a rapid recovery in the US economy.  Vaccinations are being administered (I had my second today).  COVID cases are declining rapidly.  With the new Johnson and Johnson vaccine added to the others, anyone that wants a vaccine will have it by June.  The market sees explosive growth as the economy reopens.  Current forecasts for the second half of the year are for 8%-12% GDP growth.  The vaccines are the real stimulus, not the pittance the politicians are throwing to people while padding their pet projects.

The reopening is showing up in the market internals.  Stocks in the travel, transportation, energy, and real estate sectors had a great month.  Smaller and midsized stocks also did great as their earnings should do relatively well in the reopening.  This really is the first month of this rotation.  It has only just begun.

The stock market, and for that matter bond market, sentiment is still too positive.  Investors are quite complacent.  It is quite likely that this correction is far from over, for both stocks and bonds.  The 10-year US Treasury bond was yielding 2% at year-end 2019.  It is likely to get there by the end of this year.  That will result in principal losses for bonds, and lower P/Es for stocks.  Earnings are great, but 2% Treasury yields imply a P/E ratio of perhaps 16x-20x for stocks.  An optimistic assessment of 2022 earnings for the S&P 500 is $200.  So, a near-term trading range of 3200-4000 seems right on a valuation basis.  It is 3800 today.

The elephant in the room is when will the bond market force the Federal Reserve to stop throwing money into the system.  Over the last twelve months, the money supply has grown by over 26%.  The markets are anticipating a change in Fed policy away from the tremendous liquidity that has supported bond and stock prices.

As we have been saying, it remains prudent to have some cash for a better buying opportunity down the road.

   A note from WSC and WAMI . . .

Robert C. Davis is a Chartered Financial Analyst and is affiliated with Woodlands Asset Management, Inc. as a consultant.  Founding partner of Davis Hamilton Jackson and Associates, a Houston based investment advisory firm; Bob is now retired and living in Chappell Hill, Texas.  He now lends his expertise and knowledge of the markets to our company and customers.  We hope you find it interesting and insightful. 

Woodlands Securities Corporation, Member FINRA and SIPC

Woodlands Asset Management, Inc.

10655 Six Pines Drive, Suite 100

The Woodlands TX 77380



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