This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Chart in Focus
McClellan Financial Publications
Feb. 26: The steepness of the yield curve is a decent indicator of future financial-market liquidity. It is tough to depict all of the different bond yields along the entire maturity spectrum, and so I am simulating that yield-curve steepness by looking at the spread between 10-year Treasury note yields and three-month T-bill yields. And the key insight is that the movements of this yield spread tend to get echoed approximately 15 months later in the relative-strength ratio of the
In other words, yield-curve steepening shows up 15 months later as small-cap outperformance. That is a fun thing to know. And a hard thing to wait for, sometimes.
Feb. 26: Total consumer spending on goods rose by 5.8% in January, with spending on consumer durable goods up by 8.4% and spending on nondurable consumer goods up by 4.3%. While these increases were in line with our forecast, the 0.7% increase in consumer spending on services was smaller than our forecast anticipated….
The level of spending on consumer durable goods is now 19.8% above the prepandemic level, with spending on nondurable consumer goods 6.4% percent higher (based on the nominal spending data). At the same time, consumer spending on services, which accounts for roughly two-thirds of consumer spending, is 5.5% below the prepandemic level. This reflects the degree to which the services sector has been restricted over the course of the pandemic, with spending to remain repressed until the economy is more fully reopened. With the saving rate now sitting at 20.5%, reopening would bring a significant boost in spending even without the looming third round of economic impact payments. What will take time to discern, however, is whether, or to what extent, there have been lasting changes in consumer behavior in a postpandemic world, which will clearly impact the scope of any reopening bounce in spending on consumer services.
—Richard F. Moody
Goodbye, Reagan and Volcker
Daily Insight Research
Feb. 25: BCA Research’s U.S. Investment Strategy & U.S. Political Strategy services conclude that the enduring influence of Ronald Reagan and Paul Volcker may have run its course.
The Volcker Federal Reserve’s uncompromising resistance to the 1970s’ runaway inflation established the Fed’s credibility and enshrined a new global central-banking orthodoxy. But the pandemic overrode everything else in real time, and investors may ultimately view 2020 as the year when Democrats broke away from post-Reagan orthodoxy and the Fed decided that Volcker’s vigilance was no longer relevant.
If inflation, big government, and organized labor come back from the dead, globalization loses ground, regulation expands, antitrust enforcement regains some bite, and tax rates rise and become more progressive, then the four-decade investment golden age that Reagan and Volcker helped launch may be on its last legs.
We recommend that multi-asset investors underweight bonds, especially Treasuries. We expect that the clamor for bigger government will contribute to a secular bear market that could rival the one that persisted from the 1950s to the 1980s. Within Treasury portfolios, we would maintain below-benchmark duration and favor Treasury inflation-protected securities over nominal bonds, at least until the Fed signals that its campaign to re-anchor inflation expectations higher has achieved its goal. Gold and/or other precious metals merit a place in portfolios as a hedge against rising inflation, and other real assets, from land to buildings to other resources, are worthy of consideration, as well.
Sweet Spot for Bank Mergers
Feb. 24: Mergers and acquisitions in the financials space are off to an exciting start in 2021, allowing banks to quickly develop skill and scale through more-meaningful combinations.
There are three reasons that acquisitions by banks are accelerating. First, top-line growth, while improving off 2020 levels, is expected to remain soft through 2021, necessitating new ways to fuel expansion. Second, the industry has record excess capital, allowing for more cash-funded transactions that could create accretion to earnings. Third, acquisitions beget acquisitions, as competitors sharpen their competitive advantages with either additional scale or skill.
Mid-cap banks remain best positioned to benefit from our expectation for increased M&A, as large-bank appetite for scale through M&A hasn’t been this high in decades, while rebounding industry valuations and record capital levels have already resulted in more-meaningful combinations. We point investors to our updated consolidation score card, which ranks Associated Banc-Corp, Banc of California, Investors Bancorp, and Triumph Bancorp as the most likely consolidation candidates in our coverage, as well as our inaugural potential buyers list, with The Bank of N.T. Butterfield & Son, Pinnacle Financial Partners, First Interstate BancSystem, and PacWest Bancorp heading the results.
—Jared Shaw and team
Interest-Rate Tug of War
Feb. 23: Our base case is that interest rates will continue to rise due to increasing growth and inflation expectations and, eventually, Fed normalization. We believe that yields will continue to move higher throughout the year with an upward projection of 1.75% (our year-end range for the 10-year remains 1.25% to 1.75%). We also believe that, if rates move too high too fast, the Fed will intervene to make sure rising rates don’t become too restrictive and disrupt equity markets or the real economy. A number of consumer loans are influenced by the levels of the U.S. bond market, most notably mortgage rates. A more interesting question, at least to us, is not where rates will be at the end of the year but how quickly rates rise from here.
Additionally, during recent LPL manager research calls with fixed-income managers, we’ve heard that asset managers (most notably pension and insurance funds) will get more interested in U.S. Treasuries around the 1.50% level. It seems that now, those brave bond managers are likely to keep rates from rising faster than in years past, since there aren’t many other positive-yielding options in this yield-starved world awash with savings.
So, it seems there are opposing forces pushing against each other to determine the appropriate level of rates. On the one hand, growth and inflation expectations are pushing yields higher, while the prospects of potential Fed intervention and increased savings demands due to aging demographics (both U.S. and non-U.S. savers) may help to keep rates contained. We’ll continue to watch how this dynamic unfolds. Who says fixed-income markets are boring?
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