M2 BARRON’S February 22, 2021
seemingly lowered the odds of the interest
rate cuts the Federal Reserve ultimately fol-
lowed through with. If the 2021 economic
data continue to surprise to the upside,
faster inflation and the speed of the recovery
could force the Fed to take its foot off the gas
sooner than expected, the thinking goes, and
that could threaten the bull market.
This time is a bit different, however, for
several reasons. Benchmark interest rates
are as low as they can be without being
negative, and the Fed has made it explicit
that it will tolerate periods of higher infla-
tion to make up for past shortfalls. A rate
increase is off the table until the economy
and employment are in much better shape
than they are now. Chairman Jerome Pow-
ell is likely to emphasize that at his Con-
gressional testimony this coming week.
And those concerns ignore the fact that
yields are rising for the right reasons—be-
cause the economy is improving, and be-
cause financial markets are getting back to
normal after an unprecedented shock.
“If earnings growth continues to show
improvement, you can absorb higher bond
yields,” says Jefferies equity strategist Ste-
ven DeSanctis.
Keith Lerner, chief market strategist at
Truist Advisory Services, looked at 16 post-
war periods in which yields rose. The S&P
500 was up in 13 of those windows, with an
annualized total return of 13%. In other
words, rising rates and rising stocks go hand
in hand more often than not. An apt parallel
might be 2009, when the 10-year Treasury
yield increased by 1.6 percentage points and
the S&P 500 returned 26%.
“The tug of war over multiples and
when the Fed might flinch will inject vola-
tility, but I don’t think that ends the bull
market,” he says. “It just moves us to the
next phase.” An improving economy
should also lower companies’ credit risk,
Lerner notes, so the cost of capital needn’t
move up nearly as much as yields will.
Sure, under the surface there will be win-
ners and losers from a higher-yield back-
drop. High-multiple, long-duration stocks
like those of many highflying software com-
panies will be disadvantaged. Bond-proxy
sectors like utilities will appear less attrac-
tive relative to risk-free Treasuries.
But the economic recovery will be ex-
pressed in higher revenue and earnings
across the market. As long as those come
back faster than rising yields pressure price/
earnings multiples, there’s no reason why
the bull market need end. Longer-term infla-
tion is another conversation. But for the
present, there are better things for stock
investors to worry about than a faster-than-
expected economic recovery in 2021.
Banks Still Have Room to Run
Bank stocks have been on a tear this year.
But the rally looks to be in the early innings,
giving investors ample time to buy shares.
In early 2020, the double whammy of low
interest rates and a weak economy crippled
bank profits. But late last year, the promise
of new vaccines to combat Covid-19, coupled
with the steepening yield curve, sent shares
soaring. Bank stocks today trade roughly
where they did a year ago, with the KBW
Bank Index up more than 16% this year,
outpacing the S&P 500’s 4% gain.
With such a swift jump, investors on the
sidelines can’t be blamed for wondering if
they missed out, but there are still plenty of
opportunities near- and longer-term, due to
both market dynamics and fundamentals.
Despite the run-up, theSPDR S&P Bank
exchange-traded fund (ticker: KBE) has
gained just 9.6% in the past 12 months, trail-
ing the S&P 500 by 7.4 percentage points.
Rising yields and higher economic
growth expectations have helped drive
shares higher. But bank stocks should also
benefit from buybacks, whichthe Fed per-
mitted again following a brief halt, as well
as the eventual release of loan-loss reserves
into earnings.
Last year, the largest banks were saved by
Vital Signs
Friday's Week's Week's
Close Change % Chg.
DJ Industrials 31494.32 +35.92 +0.11
DJ Transportation 13274.21 +99.12 +0.75
DJ Utilities 846.51 -10.59 -1.24
DJ 65 Stocks 10415.12 +10.29 +0.10
DJ US Market 993.43 -7.39 -0.74
NYSE Comp. 15362.69 -6.91 -0.04
NYSE Amer Comp. 2639.13 +14.64 +0.56
S&P 500 3906.71 -28.12 -0.71S&P MidCap 2535.39 -9.16 -0.36
S&P SmallCap 1288.77 -9.13 -0.70
Nasdaq 13874.46 -221.01 -1.57
Value Line (arith.) 8843.35 -5.24 -0.06
Russell 2000 2266.69 -22.67 -0.99
DJ US TSM Float 41413.61 -319.62 -0.77Last Week Week Earlier
NYSEAdvances 1,552 2,117
Declines 1,747 1,171Unchanged 46 60
New Highs 556 758
New Lows 30 27
Av Daily Vol (mil) 4,885.9 4,593.5
Dollar(Finex spot index) 90.34 90.48
T-Bond(CBT nearby futures) 163-030 166-050
Crude Oil(NYM light sweet crude) 59.24 59.47
Inflation KR-CRB(Futures Price Index) 188.62 185.29
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