Higher Rates but Not Interstellar

The market was a mixed bag this week, as the Dow moved slightly higher while the S&P 500 and the NASDAQ posted modest declines. Financial and Energy were the big winners as oil prices went higher from deep freeze demand across the country. But the big talk of the week was higher interest rates and, of course, landing an SUV-sized rover on Mars.

Sure, higher rates will push some investors from stocks to bonds, but we are still in historically low territory. There will be no mass planetary migration from stocks to fixed income anytime soon.

However, there could be short-term fits and starts. Remember, in 2013 the market corrected back -6% when the Fed suggested rate hikes after a +30% market run. Ironically, it took the Fed almost another two years before rates actually increased. Spacey, we know.

Oil’s Comeback:

The price of U.S. crude oil on Tuesday rocketed past $60 / barrel for the first time in more than a year amid supply disruptions that challenged Texas. But as we predicted for months, oil prices did, in fact, rise. As we move out of the COVID winter and into a rebounded spring, and with the summer driving season around the corner, the demand for oil will push higher. We do not believe, however, that Elon Musks’ announcement of additional Disney-like, jet-fuel guzzling, space flights for entertainment value will spike prices. We just think he’s sometimes, well, in orbit.

More importantly, just because we’re driving more electric cars, and heating more through solar and wind, doesn’t mean the vast majority of our energy consumption will not be oil / natural gas for a long time. Even at this point, $60 isn't interstellar, and we think $70 barrels aren't out of the question.

Start to Watch Interest Rates:

Prices of U.S. government bonds fell last week, sending the yield of the 10-year U.S. Treasury bond to the highest level in nearly a year. The 10-year yield rose on Friday to around 1.34%; the 30-year U.S. Treasury now yields about 2.14%. But remember, as stated above, these rates are historically low.

Five-year inflation expectations have more than doubled from last year's low and are now near the highest level since 2013. Also, last week's retail-sales report showed spending increased by 5.8% in January versus the year prior. And January 2020 wasn’t during a pandemic. This combination shows a robust economic future and, therefore, higher rates most likely.

Investors should anticipate short-term ups and downs in this rising market. But with the economy, Fed policy, and corporate financial metrics situating us at the earlier stages of the typical business cycle, we think increases in rates from recent historic lows represent a short-term risk to the current rally, not a more structural threat to the broader expansion.

Warren Buffett Over the Moon

In a reversal from 2020, large-cap U.S. value stocks have been outperforming their large-cap growth counterparts year to date, and they outperformed again last week. Remember, value stocks substantially underperformed in 2020 when investors flocked to growth tech during the pandemic. The rotation back to the stable stocks continues, which makes the Warren Buffett crowd feeling again that the world is going to be ok. We believe this trend continues through 2021.

And that's your one-minute weekly market scoop.