Watch the CPK Market Action Report: April 2021
Rising bond yields drove parts of the market lower in March with tech and other high-flying growth stocks taking the brunt of the blow. Could this just be a short term reset from the dramatic upward move in these stocks or will it be the start of a much steeper and wider market decline in the weeks and months ahead?
Watch the full 3-minute Market Action Report now:
April 2021
Rising bond yields drove parts of the market lower in March with tech and other high-flying growth stocks taking the brunt of the blow. Could this just be a short term reset from the dramatic upward move in these stocks or will it be the start of a much steeper and wider market decline in the weeks and months ahead?
The action starts, NOW!
INDEX PERFORMANCE RECAP
The reopening of the economy, stimulus and vaccine optimism had global investors pricing in a huge economic growth causing yields to rise and equity markets, in particular the mega cap and tech sector to pullback. The indexes were much more resilient. The Dow Jones Industrial was up 6.17% and the S&P 500 closed at a record high up 3.39%. The Nasdaq closed down 1.19%.
EQUITY UPDATE
Although tech and the high-flying growth stocks had a pretty rough month, the rise in bond yields was not the exclusive cause. The fact is investors looking for earnings growth during the pandemic of 2020 had nowhere to go but tech. As they flooded into those stocks, shares catapulted to historically high valuations. As we begin to reopen and the economy regains its strength, investors are unwinding their huge tech positions and reallocating into much less expensive sectors that will benefit from a growing economy such as financials, industrials, energy and materials.
BOND UPDATE
March definitely saw the disorderly rise that I have been warning you about in the 10 yr yield. It jumped from mid 1.4% to an intraday yield of 1.76% at the end of the month. Just as I had promised, this disorderly rise in rates brought with it an unfriendly pullback in equities. Powell’s dismissal of the rise in bond yields early in the month did not help slow the selloff in equities.
With all this stimulus, accelerated vaccinations and a dramatic improvement in the labor market, I think it will be hard for the Fed to standby and not announce plans to taper QE in the coming quarters. Any such actions will most likely bring with it a higher yield in the 10yr and additional pressure on stocks.
COMMODITY UPDATE
Early in the month, oil set a record increase for its largest inventory build of 21.6M barrels. This was a dramatic increase over the expected move of just 3M barrels. However, a recent rise in Covid-19 cases and new strict lockdowns in Europe has global producers becoming cautious about the demand recovery and economic rebound. To avoid a spike in volatility and a price correction, OPEC will need to show a commitment toward price stability in this week’s meeting.
In industrial metals, copper experienced some profit taking this month from its overbought level. While the medium and longer-term trends remain bullish, a break down through key support around $3.40 could present concerns about the economic recovery and be a warning sign for risk assets overall.
Gold slid lower at the end of the month testing its 2021 low of 1680/oz. If the recent rise in the dollar and the 10yr treasury continues, expect gold to be negatively influenced by both. Both the 50-day and 100-day moving averages for gold have now dipped below the 200-day moving average giving us a technical indication of the medium and longer-term momentum.
CURRENCY UPDATE
The dollar index drifted back above $93 in March. This is a first since early November. If the current pace of vaccinations in the U.S. continues, the dollar could see more positive movement as our economy returns to normal sooner than expected.
ECONOMIC UPDATE
As key economic data continues to improve throughout the year, we should expect rates to keep rising with the 10-year reaching the 1.75% to 2% level by year end. Investors will consider the rising yield to be a threat to the bull market and they will expect action from central banks. Unfortunately, Jerome Powell’s speech early in the month, fell short of providing such details and spurred a lack of confidence amongst investors increasing the selling pressure on stocks.
GEOPOLITICAL UPDATE
President Biden announced a, “Build Back Better” infrastructure spending plan that will be around $2T. This is in addition to the $1.9T stimulus bill that Congress just passed just last month. While all of this stimulus is good for the economy, markets will be a bit more reserved and cautious over concerns of higher yields, rising inflation, a Fed that might not remain so dovish through 2021 AND Congress’s serious push to increase taxes on individuals, corporations and investments.
THE WRAP
There is a tremendous amount of money that has been pumped into the economy within a relatively short period of time. While this is all good in the short run for the economy, there will definitely be a day of reckoning when we have to pay this all back. Historically, this is accomplished by using one or a combination of two options. They are inflation and taxes.
Ironically, that is exactly what is happening. Inflation can be seen in the rise of the 10yr Treasury yield, and the current Presidential administration is pushing to raise taxes on individuals, corporations and investments.
Even though the Fed is using various tools to artificially control inflation for the time being, that will not go on forever. Based on the success the Democrats had in passing the most recent stimulus bill, you should not underestimate their ability to pass these soon to be tax increases.
CPK FOCUS
For the month of April, our models are currently holding 30% cash.
Our broad focus is on domestic and international equities.
On the Domestic front, our attention is on Small Cap Growth, Small Cap Value, Small Cap Blend and Mid Cap Growth. Our favored sectors are Consumer Cyclical, Energy, Financials, Industrial, Technology and Basic Materials.
As for International Equities, our focus is on Asia-Pacific Developed and European Developed.
CPK DISCLAIMER
As a reminder, my current allocation is not a recommendation. Regardless of what happens next, investors like you need to have a simple and yet solid financial plan that reduces RISK, COSTS and TAXES while securing the necessary income you need to maintain your lifestyle throughout retirement.
If you don’t have a plan OR you’re not comfortable with the plan you have, call me today to get pointed in the right direction.
I’m Chad Kunc and that puts a wrap on the April 2021 Market Action Report. Thanks for joining me. It’s time for me to get back to the markets.
And that action starts, NOW!