Delta Force

Delta force.  Stocks sank yesterday on renewed fears of rising COVID cases globally.  Cash moved from stocks to less-risky treasuries causing yields to plummet further.


The high bar.  There is no real utility in going over yesterday’s stock rout, in depth.  At a high level, stocks sold off after finally realizing that people are still getting COVID-19.  Mostly unvaccinated folks, and though the percentage gains can raise eyebrows, the absolute numbers are far lower than 2020 surges, while hospitalizations and deaths are lower yet, owing to the lower average age of the infected.  All sectors closed underwater yesterday and the worst hit were those that are most sensitive to economic health.  The least affected sectors were consumer staples, always a safe haven in times of trouble, and technology, which had become the go-to in the worst period of last year’s economic turmoil.  At an even higher level, the index level, yesterday’s sentiment was clear. The Dow Jones Industrial Average closed out the day down by -2.09% while its tech-and-growth-heavy cousin the Nasdaq Composite dropped by only -1.06%.  The Dow is heavily weighted with cyclical stocks while the Nasdaq is dominated by growth stocks… hence the discrepancy.  So if you like and own growth stocks, yesterday was a tough day but you got some cold comfort in knowing that your stocks did better… or rather less worse… than value stocks.

Let’s move over to the bond markets, but first a word on stocks versus bonds.  Stocks are fun to talk about.  They all have stories and unique contours making them easy to get behind.  They build fan bases, not unlike star athletes.  In contrast, bonds have less sizzle and wow-factor.  This has caused many investors to pick a side.  I frequently hear things like “I  am not a bond person… stocks are my thing.”  Ok, I get it, but even if you don’t find bonds exciting and you are not enticed with 2-year yields at 0.20%, you should still… if you are wise… follow the market.  Why?  Because, bonds are more directly tied to the economy than stocks and, in the case of corporate bonds, priced more directly to the underlying credit quality of the issuer. 

So what are bonds telling us lately?  Do you remember 2019? Stocks were on the climb after a difficult 2018.  By mid-year stocks were making new highs once again despite a growing fear of recession.  Economic growth was slowing and corporate earnings growth, sans 2017 tax package benefits, was stalling.  The bond markets were flashing their most prominent warning signal… a yield curve inversion.  The spread between 2-year treasuries and 10-year treasuries was negative. That means that you make more yield in shorter maturities than longer, which historically portends to a recession with a high degree of accuracy.  The Fed was concerned and actually adjusted rates lower helping stocks to rally into the year-end.  The rate cut caused shorter maturity yields to fall which brought the yield curve back into positive, but still flat, territory.  Then came the pandemic.  The Fed’s move to lower the rate to effectively 0%, steepened the curve further.  The Fed lowered rates by around -150 basis points while 10-year yields fell by only around -70 basis points (as investors rushed into treasuries as a safe haven).  Ten-year treasury yields hovered around 0.70% until late September when it became clear that 2021 would be a recovery year.  Reflation meant economic prosperity and… wait for it… inflation.  For treasuries that meant rising yields to make up for rises in prices of goods.  With Fed Funds still pegged at 0% holding shorter maturities low, rising 10-year yields steepened the yield curve significantly.  In contrast to a flattening yield curve predicting a recession, a steepening yield curve is a sign of strong economic prospects.  The steepening accelerated in the first quarter of 2021 as 10-year yields peaked around 1.75%, driven by rising inflation concerns.  Suddenly in May, 10-year yields began to fall. Initially, the move was a head-scratcher for investors as yields typically rise with inflation expectations.  EXCEPT (intentional capital letters), if bond traders are worried about an economic contraction.  What happened with the yield curve during that time?  From the date that the 10-year hit its high through yesterday, the curve flattened by around -160 basis points… a clear yellow flag that bond traders are sending to the markets.  Notably, however, the curve is still positive leaving some room for optimism.

These are clearly tumultuous times and markets are wrestling with unprecedented drivers. Historically high levels of stimulus, high stock valuations, inflation prospects, and economic growth combined with a persistent and evolving pandemic, have placed stocks and bonds at an inflection point.  What does that mean for us going forward?  Unfortunately, we can expect lots more volatility until we get action from the Fed, clear signs of fading inflation, and solid indication that the virus is no longer a threat.  The best prescription for the bumpy days ahead (aside from maybe a bit of Dramamine) is to continue to focus on your long term investment plan.


Stocks fell sharply yesterday on growing fears of a COVID resurgence.  The S&P500 fell by -1.59%, the Dow Jones Industrial Average dropped by -2.09%, the Nasdaq Composite Index slipped by -1.06%, and the Russell 2000 Index gave up -1.51%.  Bonds rose and 10-year treasury yields fell by -11 basis points to 1.18%.  Cryptos dropped by -4.89% as Bitcoin fell by -2.77%.  Bitcoin’s drop raised eyebrows as it fell while traditional safe haven gold and treasuries rose in response to the stock selloff.  


– Housing Starts (June) are expected to have risen by +1.2%, slower than the prior month’s rise of +3.6%.

– Building Permits (June) may have risen by +0.70% compared to May’s -2.9% drop.

– This morning Signature Bank, Synchrony Financial, Halliburton, Philip Morris, Ally Financial, and HCA Healthcare beat estimates. After the market closes we will hear from Netflix, Chipotle, and United Airlines.


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