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The topic on investor’s minds last week was concerns over a sudden rise in inflation expectations. Bond yields rose as prices plunged (bond prices and yields move inversely) and the broad major stock indexes pulled back. The selloff was most notable in the tech-heavy Nasdaq as investors shifted toward companies that will benefit from a faster growing economy; namely, airlines, hotels and other travel-related businesses. The Nasdaq closed down almost 5% on the week.

To gauge how serious inflation threats might be, we examine the spread (difference) between the yield on the five-year treasury and the yield on inflation-protected Treasurys known as TIPS. The difference is called the “break-even rate.” With last week’s action in the bond market, that break-even rate rose to 2.4%, the highest level since May 2011. This suggests inflation is going to rear its ugly head.

But there is more going on below the surface. Short-term interest rates have spiked above long-term rates. This is called an “inversion” and typically forecasts a sharp spike in inflation that quickly falls away.

To summarize: the five-year break-even rate is 2.4%. The ten-year rate is 2.15% and the longer 30-year break even rate is 2.1%. The five-year break-even rate hasn’t been above the ten-year rate since 2008. Put this all together and most analysts expect this sudden burst of inflation to evaporate. Even Federal Reserve Chairman, Jerome Powell said the central bank isn’t about to alter its monetary policy. What more could you ask for?

The chart below from the Wall Street Journal is difficult to see but if you look closely you will notice the yield on 5-year treasuries is higher than the 10-year. That type of event doesn’t last long.

If you have any questions, please contact me.

The Markets and Economy

U.S. manufacturers did an excellent job of scaling back production during the pandemic last spring. In fact they did too good of a job. Now many companies are finding they were unprepared for the strong rebound in consumer demand that began just weeks into the summer months. Consumer spending on long-lasting goods rose 6.4% in 2020 but domestic production of those goods fell 8.4% according to government data.
Johnson & Johnson received Emergency use Authorization over the weekend for the third vaccine available for use in the U.S.
The British pound has been hammered over the last few years first by Brexit fears and then Covid-19 concerns. Last week, however, the U.K. currency rose to its highest level since 2018. The British economy was one of the hardest hit by the pandemic, but now the country is on course to be the first major economy to inoculate its entire adult population.
Workers at America’s hotels, restaurants, bars and convention centers have been among the hardest hit during the Covid-19 pandemic. The lack of travel by Americans has caused many gathering spots to close or reduce their staff significantly. 15.9% of the industry’s workers remain unemployed; more than any other industry, according to the government’s Bureau of Labor Statistics. The end result is millions of hospitality workers trying to launch new careers in unrelated industries.
2020 was the ninth-consecutive-year of record new home construction in the U.S. In 2020, 991,000 new homes were built as demand continues to be strong for the foreseeable future. Home-price growth accelerated in December as the number of homes on the market continued to decline. The average price for a home rose 10.4% last year.
Demand for long-lasting manufactured goods jumped in January as the U.S. economic recovery gained momentum during the start of the year. The 3.4% increase in durable goods products was the largest increase since July 2020.
Student loan debt in the U.S. was 90% larger than credit card debt nationwide. The total for all student loans stood at $1.56 trillion compared to $820 billion for all credit card debt according to the Federal Reserve Bank of New York.
Household income rose 10% in January from the previous month. The second-largest increase on record was the result of the federal pandemic $900 billion relief program passed in December of last year.

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The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Consult your financial professional before making any investment decision. You cannot invest directly in an index. Past performance does not guarantee future results.

Note: All figures exclude reinvested dividends (if any). Sources: Bloomberg, Dorsey Wright & Associates, Inc. and The Wall Street Journal. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Securities offered through Triad Advisors, member FINRA/SIPC. Investment advice offered through Resources Investment Advisors, LLC, an SEC-registered investment adviser. Resources Investment Advisors. LLC and Vertical Financial Group are not affiliated with Triad Advisors.

David Kover on March 1st, 2021

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