Highlights:

• The Federal Reserve held its key interest rate near zero and said it plans to continue supporting the economic recovery, while acknowledging recent progress in growth and employment.
• The Fed said “Inflation has risen, largely reflecting transitory factors.”
• A burst of growth brought the U.S. economy to just a hair below its pre-pandemic size in the first quarter, extending what is shaping up to be a rapid, consumer-driven recovery this year.
• Gross domestic product, the nation’s broadest measure of goods and services, grew at a 6.4% seasonally adjusted annual rate in January through March, the Commerce Department said Thursday. That left the world’s largest economy within 1% of its peak, reached in late 2019 before the corona-virus pandemic hit the U.S.Congress responded quickly, approving several packages totaling about $5 trillion in aid for households and businesses. The Federal Reserve pushed its benchmark interest rate to near zero to lower borrowing costs.

MARKET RECAP

Stocks were flat for the week but the “Everything Up” market is still in command. Lumber, residential homes, stocks, bitcoin, dogecoin, Gamestop, SPACs, etc, if not at an all-time high, these assets were just recently. The rallies can continue, there is lots of momentum, lots of dollars floating around, and about the easiest Fed that anyone can remember.

But there are some factors that might at least put a pause on the rally. Biden’s proposed capital gains tax is one, he proposed upping the tax on wealthy Americans to 43.4%, higher than the rate on wage income.

Both bitcoin and US stocks took a minor hit on the announcement, although stocks recovered by the weekend.

Excessive leverage in the system is a threat. Sometimes it shows up out of nowhere. Investments that went against Archegos Capital Management, which was wildly leveraged across multiple firms, caused $10 billion in losses. How many other Archegos’s are out there? How much leverage is tied up in bitcoin? What about in stocks?

Total margin debt closed out February at an all-time high. The 49% increase, year over year, was the fastest increase since 2007.

But on the plus side, the economy is beginning to boom. Of course, it has been helped by trillions in government and Fed stimulus. Morningstar, in line with other forecasts, just upped their read GDP for estimated growth to 6.2% this year.

And unemployment claims are starting to fall fast.

SCOREBOARD

SCOREBOARD

MARKET RECAP

The first quarter closed on Thursday. US stocks registered a 6.5% advance followed by international stocks at 4.5%. US bonds fell by 3.6% due to the fast run-up in interest rates. The yield on the 10-year treasury increased by 81 basis points or 89% during the quarter. Bitcoin just about doubled. High-interest rates, and more acceptance of bitcoin as an alternative to gold, impacted the yellow metal, which fell by 10.3%. The commodity oil was the leader for the second quarter in a row, up by 22.3%.

The economy received excellent news on the job front as hiring surged in March. Job increased by 916,000 during the month and the unemployment rate fell to 6%. Infections have turned slightly up in the last couple of weeks, but they are way down for a few months ago, and as more and more Americans get vaccinated, consumer confidence is increasing with the feeling that the end of the pandemic is near. The surging jobs numbers, along with positive momentum in the economy, reenforced the question of the need for the recent $1.9 trillion stimulus bill.

Biden announced the first part of his $2.3 trillion infrastructure plan, to be spent over 10-years. It includes $600 billion for traditional infrastructure projects like roads and bridges. Then there is $374 billion for broadband access, modernizing the electric grid, clean energy, and electric vehicles. $480 billion for manufacturing and research and development. And $500 billion for caregivers and workforce development. The plan would be financed by higher corporate taxes and Biden claims the plan would pay for itself within 15-years.

Hedge fund Archego imploded this week. The fund had $10 billion under management but market exposure of $30 to $100 billion. The fund was brought down by excessive leverage and concentrated positions.

SCOREBOARD

MARKET RECAP

US stocks were up by about 1.5% for the week.

As if the $1.9 trillion stimulus, coming on top a few trillion prior was not enough, Biden is putting the finishing touches on his next proposal, a $3 trillion infrastructure package. So the spending of the monopoly money looks like it is set to continue without a care. Don’t worry, Biden figures he will pay for all of this with higher taxes.

Consumer spending was down 1% in February, mainly due to the cold weather, according to economists. Household income, without the benefit of Federal giveaways, was down by 7.1%. But economic activity is expected to jump higher over the next few weeks and months. Visits to restaurants and hotels are up, and airline activity continues to increase. Inflation remained under control in February. The price index for personal consumption expenditures was up by 1.6% year over year. That was up from 1.4% in January and was the largest increase since February of 2020, but still shy of the 2.0% target. The Fed expects inflation to reach 2.4% by the end of 2021 and then drop back to the 2% target.

SCOREBOARD

MARKET RECAP

Stocks were off by 1.03% in the US and were higher outside the US by 0.17%. Bonds fell by 0.25% as the 10-year yield continued to rise. Oil dropped by 6.4%. Investors are worried about threats of inflation and interest rates that are rising quicker than anticipated.

The yield on the 10-year Treasury is up by 89% year-to-date, and the market started noticing the increase around February 8th, since then stocks have been flat.

Taxpayers received $242 billion in stimulus payments on Wednesday, a good portion will end up in the equity markets. Bank of America reports that $68.3 billion was invested in equity funds this past week.

Former Treasury Secretary and Democrat Lawrence Summers is not happy about the stimulus, saying “these are the least responsible fiscal macroeconomic policy we’ve had in the last 40 years,” and putting the blame on both parties. Summers says we a facing a “pretty dramatic fiscal-monetary collision.” He says there is a 1 in 3 chance the US will face stagflation, or the Fed will push the brakes too hard forcing a recession.

SCOREBOARD

HIGHLIGHTS

• The US was up by 3.31% and international 1.85%. The Dow and the S&P 500 close at record highs.
• The 10-year increases by 8 basis points and the 30-year by 12.
• The $1.9 trillion stimulus package is now law.
• Every adult in the US will be eligible for a vaccine by May 1 according to Biden.
• Henry Kaufman worries about the market’s reliance on the Fed…
• …and their independence
• Household wealth at an all-time high.
• GME soars again.

MARKET RECAP

US stocks advanced by 3.31% and international stocks were up by 1.85%. Bonds declined by 0.43% as the long end of the curve continued to see higher interest rates. The S&P 500 and the Dow closed at a record high. The Nasdaq 100, which was off its high by about 10% last week, rallied and is now down 6.3%. A massive stimulus bill and Biden’s announcement that every adult in the US can get a vaccine by May 1 fueled the optimism.

The $1.9 trillion stimulus package was passed into law. The economy was already set for strong growth in 2021, but the economy might really accelerate now with this. This is the likes of which we have never seen before, a massive stimulus package, coming on the heels of two other massive stimulus packages, plus interest rates at close to zero, and a Fed promising to let inflation run hotter than its target with no intervention.

Higher interest rates on longer-term bonds like the 10-year could force expanded P/E ratios to contract, but the bulls are counting on booming earnings to offset the lower ratio to keep stocks on the march higher.

Randall Forsyth writes in Barron’s this week about Henry Kaufman, the widely followed chief economist at Salomon Brothers in the 1970s and 80s, who has written a new book, to be released next month, The Day the Markets Roared. A reference to his call that long-term interest rates would decline back in August of 1982. That set off the rally of the 80s, 90s, and arguably beyond. Kaufman now questions the independence of the Fed. “The implication is near-term political decisions may have greater force over financial market behavior than ever before.” Going on to say that “It seems to be that the equity markets are highly dependent on the continuation of monetary ease.” Basically, we are at the exact opposite point from August of 1982. Back then, we had sky-high interest rates with a tight Fed run by Paul Volker that operated with a long-term view, whereas now, we have artificially low-interest rates, almost at zero, with a Fed willing to monetize most anything and seemingly in sync with the desires of the administration.

Household wealth soared last year by 10% to an all-time high of 130.2 trillion. Of the 5.6% increase in the 4th quarter, almost all of it came from asset price gains.

Gamestop (GME) closed this week at $264.50 and got as high as $348.50. It has declined to about $40 in February after its first incredible run. The recent rally began when Ryan Cohen, the Board member and founder of Chewy, was selected to lead a board committee to work on the Company’s transformation into the digital age. GME is symbolic of this crazy market and some of the rampant speculation that is marking this era.

SCOREBOARD

Some highlights from the week:

• 370,000 new jobs added in February, a strong report.
• GDPNow is projecting Q1 growth of 8.3%.
• The yield on the 10-year continues to rise, closing at 1.551%, down from 1.626%.
• Inflation expectations are rising, now at 2.22% based on the 10-year breakeven.
• Nasdaq is down 8.3% in three weeks and was down more than 10% on Friday morning.

SCOREBOARD

MARKET RECAP

Stocks were down by 2.86% in the US and 3.92% outside the US. Bonds fell by 0.43%. Spiking interest rates and the fear of inflation dropped stocks.

The yield on the 10-year Treasury rose by 16 basis points on Thursday to close at 1.54%. That is up by 50 basis points since January 27, about one month ago, and up from the August 2 closing low of 0.52 by 102 basis points.

What has been most dramatic is the speed of the increase. A technical indicator called the Relative Strength Index (RSI), developed by J. Welles Wilder in the 1970s does a good job measuring the speed and change of price movements. According to Wilder, an RSI reading above 70 indicates an overbought condition. Yesterday, the RSI, as measured over 14-days, for the 10-year was 85.89. An RSI reading above 85 is rare.

It has only happened three times this century, back in 2007 and 2016. It did not happen at all in the 1990s and only happened two times in the 1980s. When it did happen frequently was the 1970s when it occurred 11 times*. The 1970s was a decade of high inflation and interest rates.

The exploding interest rate makes some sense. As we have been writing about when you are spending trillions like it is nothing, something is bound to happen, whether that be inflation or higher interest rates, or both. It is too early to say if this kind of increase is a foreboding of things to come, or just a one-off. We do not want to relive the 1970s, at least in economic terms.

Interest rates have been artificially suppressed. And that has led to artificially high asset prices, in the stock market and also. It has also distorted the economy by giving a lifeline to “zombie” companies. It has suppressed the creative destruction process. So a return to a normal interest rate would be good, but not in a runaway manner. That would be too disruptive and cause a host of other problems.

Jobless claims fell to the lowest level since November, dropping by 111,000 to a seasonally adjusted 730,000 last week. Weekly claims rose as high at 900,000 in early January but have been dropping since as the job market appears to be picking up some slow momentum.

Consumer spending was up by 2.4% in January as household incomes increased by 10%, helped by stimulus checks.

SCOREBOARD

RSI Breaks 85 on the 10-Year Yield

The yield on the 10-year Treasury rose by a staggering 16 basis points yesterday to close at 1.54%. That is up by 50 basis points since January 27, about one month ago, and up from the August 2 closing low of 0.52 by 102 basis points.

What has been most dramatic is the speed of the increase. A technical indicator called the Relative Strength Index (RSI), developed by J. Welles Wilder in the 1970s does a good job measuring the speed and change of price movements. According to Wilder, an RSI reading above 70 indicates an overbought condition. Yesterday, the RSI, as measured over 14-days, for the 10-year was 85.89. An RSI reading above 85 is rare.

It has only happened three times this century, back in 2007 and 2016. It did not happen at all in the 1990s and only happened two times in the 1980s. When it did happen frequently was the 1970s when it occurred 11 times*. The 1970s was a decade of high inflation and interest rates.

The exploding interest rate makes some sense. As we have been writing about when you are spending trillions like it is nothing, something is bound to happen, whether that be inflation or higher interest rates, or both. It is too early to say if this kind of increase is a foreboding of things to come, but let’s hope not. We do not want to relive the 1970s, at least in economic terms.

*Please note we are only counting the initial reading, so if it happened on day 1, and also on day 2 and day 3 or even a few days later, like day 5, that would count as just one reading.