Barron's - USA (2021-03-01)

M2 BARRON’S March1,2021

cently as 2018, the Fed was saying that it

would continue to raise interest rates no

matter what, even as the economic data be-

gan to deteriorate and markets began to

wobble. All it took was a 15% drop the S&P

500 from the start of December through

Christmas Eve for Powell to change his tune.

The market has learned not to take him at

his word. “The Fed can be resolute one day

and change its mind the next,” says Dave

Donabedian, chief investment officer at

CIBC Private Wealth Management. “That’s

in the mind of investors.”

You don’t have to doubt the Fed to be

worried about the possibility of rising inter-

est rates. All you have to do is consider the

amount of money that is heading into the

economy, which is likely to boost growth

far beyond anything the U.S. has experi-

enced since the late 1980s. Jefferies econo-

mist Aneta Markowska, for one, now fore-

casts 9% gross-domestic-product growth

during the first half of 2021, far stronger

than the 3% growth implied by the Fed’s

own forecasts. If Markowska is right—and

the Fed is wrong—it could force Powell to

act sooner than he would like.

“By allowing themselves to fall behind the

curve too much, the Fed is setting itself up

for a very abrupt tone shift and a discontinu-

ous move in rate expectations,” she writes.

There’s another problem with rising

yields, one that could have bigger implica-

tions down the road. The U.S. Treasury held

two auctions this past week, and the seven-

year auction, in particular, stunk. Words

that were used to describe it included “aw-

ful,” “terrible,” and “horrible,” and we could

probably throw in “no good” and “very bad”

as well. Treasury yields moving higher be-

cause of a stronger growth outlook is one

thing, but it’s another if no one wants to buy

them, says Deutsche Bank strategist Alan

Ruskin. “[Yields] backing up because auc-

tions go poorly directly ties yields to addi-

tional Treasury supply, and poses some

awkward questions about whether the ex-

treme fiscal-monetary accommodation, is

really a free lunch,” he explains. “[If] Trea-

sury supply is becoming a bear factor, this

is a sign of an emerging constraint to fiscal

expansion.”

That would come as a nasty shock to a

market that is counting on not only a siz-

able relief package now, but also a big infra-

structure package later in the year. That’s

no reason to dump cyclical stocks, which

have been rallying like mad, just yet. Infla-

tion is still increasing, economic and earn-

ings growth are accelerating, and monetary

and fiscal policy remains very, very sup-

portive. That’s a combination that’s been

seen during just 10 quarters over the past

60 years, notes Darius Dale, managing di-

rector at Hedgeye Risk Management.

“What’s happening right now is so rare in

economic history,” he says.

And it won’t last forever.

This Dow Is No Dog

Everything is breaking right for chemical

companyDow, but market analysts have

failed to notice. This is one time when in-

vestors can get in ahead of Wall Street.

It’s not that Dow (DOW) hasn’t been pro-

ducing gains. Its stock has risen 7% in 2021,

easily topping the 1.5% rise of the S&P 500,

and the company couldn’t ask for a better

fundamental backdrop. The economy is

improving, commodity chemical markets are

tightening—it’s one area where the Texas

weather disaster is actually benefiting some-

body—and it’s spending less on new assets,

freeing up more cash flow for investors.

Yet the stock remains unloved on Wall

Street. The Midland, Mich.-based company

was founded two centuries ago, but this ver-

sion of Dow is only a few quarters old after

spinning out of DowDuPont. That massive

transaction gave investors Dow,DuPont de

Nemours(DD), and agricultural-input

sellerCorteva(CTVA). These days, only

about a quarter of the analysts covering Dow

rate its shares Buy, well below the 57% aver-

Vital Signs

Friday's Week's Week's

Close Change % Chg.

DJ Industrials 30932.37 -561.95 -1.78

DJ Transportation 13331.27 +57.06 +0.43

DJ Utilities 795.61 -50.90 -6.01

DJ 65 Stocks 10231.46 -183.66 -1.76

DJ US Market 966.15 -27.28 -2.75

NYSE Comp. 15010.47 -352.23 -2.29

NYSE Amer Comp. 2601.66 -37.47 -1.42

S&P 500 3811.15 -95.56 -2.45

S&P MidCap 2496.26 -39.13 -1.54

S&P SmallCap 1278.56 -10.21 -0.79

Nasdaq 13192.35 -682.12 -4.92

Value Line (arith.) 8714.01 -129.34 -1.46

Russell 2000 2201.05 -65.64 -2.90

DJ US TSM Float 40254.06 -1159.55 -2.80

Last Week Week Earlier

NYSEAdvances 1,043 1,552

Declines 2,284 1,747

Unchanged 38 46

New Highs 653 556

New Lows 110 30

Av Daily Vol (mil) 6,221.8 4,885.9

Dollar(Finex spot index) 90.93 90.36

T-Bond(CBT nearby futures) 160-240 163-030

Crude Oil(NYM light sweet crude) 61.50 59.24

Inflation KR-CRB(Futures Price Index) 190.43 188.62

Gold(CMX nearby futures) 1728.10 1775.80

Interactive Brokers Rated #1

Best Online Broker 2020 by Barron’s*

02-IB21-1400CH1358

ibkr.com/compareus

IBKR charges

margin loan rates

1

from

0.75% to 1.59%

Member - NYSE, FINRA, SIPC – *Interactive Brokers rated #1, Best Online Broker according to Barron’s

Best Online Brokers Survey of 2020: February 21, 2020. For more information see, ibkr.com/info -

Barron’s is a registered trademark of Dow Jones & Co. Inc. [1] Margin Loan rate as of 02/01/2021.

IB calculates the interest charged on margin loans using the applicable rates for each interest rate tier

listed on its website. Rates shown apply to IBKR Pro clients only. Rates subject to change.

For additional information on margin loan rates, see ibkr.com/interest

Trading on margin isonly for sophisticated investorswith

high risk tolerance. You may lose more than your initial investment.