March 2021 - Beware the Ides of March!*
Continuing the 2021 positive momentum at first, markets started well in February. Then in the second part of the month equity and bonds markets (especially the long term treasury and investment grade bonds), suffered a sell off that continued into the beginning of March. The tech sector especially was sold off, while rotation stocks, and especially the energy sector continued to rally.
Indeed, if last month GameStop’s fascinating short squeeze was all over the news, in the last couple of weeks, inflation, which was possibly the most boring topic of the last decades became the new focus. It caused a jump in long term treasury yields, to above 1.60% for the 10 year, a pre-pandemic level, raising fears about a possible rate hike. All that happened while the economic recovery combined with an additional stimulus raised inflation forecasts. The Breakeven Inflation Rate for 1 year, which indicates inflation expectation for a year ahead, jumped from 2% to almost 4% in a month and a half, and the one for 3 years ahead reached its highest level since 2008, before the financial crisis.
Fed chairman Jerome Powell kept a dovish tone and tempted to reassure investors several times, however he failed to mention which concrete tools the Fed would be ready to deploy in case of an overheating economy. Neither Powell nor Treasury Secretary Yellen seem to be worried for now about inflation, explaining that this is temporary and necessary on the way to recovery. Also, according to them, rising yields are proof that the economy is improving and so there is nothing to be concerned about. Yet, despite all these remarks, the speed with which the yields are increasing remains more a concern than the level itself, especially for the tech stocks holders whose current valuations are based on future growth. But so far, no yield curve control has been proposed by the Central Bank and we may well wonder what is the level that will trigger such a move.
Note that yields were apparently not only reacting on inflation forecasts, but other factors had an impact last month: traders closing their long positions of the March 2021 10-year treasury note future contracts and banks hedging their mortgages duration by selling long term treasuries (called convexity risk coverage), contributed to the acceleration of the treasuries sell off as well.
In the meantime, the Senate finally passed the $1.9 trillion stimulus plan, and as of the time of writing it has gone back to the House of Representatives for final approval, before being sent for signature to President Biden. The deadline for the bill to be ratified is March 14th, as this is the last day of extra unemployment benefits. With the new plan, those benefits will be extended until September. This plan was strongly backed by Janet Yellen, who repeated several times that there is a need “to go big” and a risk “to not go big enough”, as the labor market is still strongly challenged, with almost the same number of jobless claims being registered as the number of people who stopped looking for a job. According to Yellen, this would mean that the real unemployment rate is close to 10% and not 6.2% as reported.
Nevertheless, jobs creation remains satisfying as is the overall economic data coming in every week. This may be enough to support the US equity markets, as we saw the turnaround on Friday, following the jobs data.
In Europe, Italy welcomed the nomination of Mario Draghi as the new Prime Minister and the Italian stock exchange is now one of the best performing markets so far this year. From the ECB side, Chairwoman Lagarde addressed the long-term bonds yields which are increasing as well. The 30 years German Bund yield became positive for the first time since September and Lagarde said that the ECB will be closely monitoring yields. More specific comments are expected during the ECB meeting later this week.
In Asia, it was a short month for the Chinese markets as they were closed one week for Lunar Year Celebrations. The best performers in the Asia-Pacific markets so far this year are Japan and Hong-Kong, while China has been strongly impacted by the tech sell off and the rising yields.
Regarding the global race for immunization, Israel is still way ahead of the rest of the world, with 57% of the population vaccinated, followed by the UK (32%) and in fifth position the US (17%).
In the meantime, Eli Lilly’s treatment was approved by the FDA for emergency use and Johnson & Johnson’ one shot vaccine was the third vaccine to be approved for distribution in the US. On the corporate side, February was marked by earnings results which were overall incredibly good: 79% of S&P 500 companies have surprised by reporting a positive EPS. We have also noted an impressive number of companies citing ESG (environmental, social and corporate governance), during their earnings calls: more than 25% of the companies mentioned the implementation of ESG linked investments and/or activities when giving their future guidance. It is not just a concept anymore but clearly a future trend.
Bitcoin came into focus as well, after several companies cited the digital asset as a potential accepted exchange currency for transactions and following Tesla’s $1.5 billion investment in the cryptocurrency. Following this announcement, Elon Musk said however that Bitcoin was too pricey.
From our side, last month we were talking about this potential correction and as we were waiting for it, we took this opportunity to increase our strong convictions: cyclicals to play the recovery, some tech sectors for long term investments and Chinese most preferred sectors, internet and consumption. We do think the markets could stay volatile for a while, but the outlook remains positive, with the global economy reopening, strongly supported by the Central Banks and low interest rates environment.
As always, risk-management combined with rigorous sector and geographical diversification will remain key factors for investment performance.
You are more than welcome to contact us to discuss our investment views or financial markets generally.
*The Ides of March corresponds to March 15th in the Roman calendar and it was used as a warning by the soothsayer in William Shakespeare’s play Julius Caesar before this latter was assassinated. The word Ides derives from a Latin word, meaning to divide.