March1,2021 BARRON’S M11
MarketView
Small-Caps Are Sitting Pretty
Chart in Focus
McClellan Financial Publications
mcoscillator.com
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 ap-
proximately 15 months later in the rela-
tive-strength ratio of the Russell 2000 ver-
sus Russell 1000.
In other words, yield-curve steepening
shows up 15 months later as small-cap out-
performance. That is a fun thing to know.
And a hard thing to wait for, sometimes.
—TOMMCCLELLAN
Consumer-Spending Surge
Economic Update
Regions Financial
regions.com
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 con-
sumer spending on services was smaller
than our forecast anticipated....
The level of spending on consumer du-
rable goods is now 19.8% above the pre-
pandemic level, with spending on nondura-
ble consumer goods 6.4% percent higher
(based on the nominal spending data). At
the same time, consumer spending on ser-
vices, which accounts for roughly two-
thirds of consumer spending, is 5.5% below
the prepandemic level. This reflects the de-
gree 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%, re-
opening 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.
—RICHARDF.MOODY
Goodbye, Reagan and Volcker
Daily Insight Research
BCA Research
bcaresearch.com
Feb. 25:BCA Research’s U.S. Investment
Strategy & U.S. Political Strategy services
conclude that the enduring influence of Ron-
ald Reagan and Paul Volcker may have run
its course.
The Volcker Federal Reserve’s uncom-
promising resistance to the 1970s’ runaway
inflation established the Fed’s credibility
and enshrined a new global central-bank-
ing 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 Vol-
cker’s vigilance was no longer relevant.
If inflation, big government, and orga-
nized labor come back from the dead, glob-
alization loses ground, regulation expands,
antitrust enforcement regains some bite,
and tax rates rise and become more pro-
gressive, then the four-decade investment
golden age that Reagan and Volcker helped
launch may be on its last legs.
We recommend that multi-asset inves-
tors underweight bonds, especially Trea-
suries. We expect that the clamor for big-
ger 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 main-
tain below-benchmark duration and favor
Treasury inflation-protected securities over
nominal bonds, at least until the Fed sig-
nals that its campaign to re-anchor infla-
tion 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 as-
sets, from land to buildings to other re-
sources, are worthy of consideration, as
well.
—MATHIEUSAVARY
Sweet Spot for Bank Mergers
Equity Research
Wells Fargo
wellsfargo.com
Feb. 24:Mergers and acquisitions in the fi-
nancials 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 ex-
pected to remain soft through 2021, necessi-
tating new ways to fuel expansion. Second,
the industry has record excess capital, allow-
ing for more cash-funded transactions that
could create accretion to earnings. Third, ac-
quisitions 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 in-
creased M&A, as large-bank appetite for
scale through M&A hasn’t been this high
in decades, while rebounding industry valu-
ations and record capital levels have al-
ready resulted in more-meaningful combi-
nations. We point investors to our updated
consolidation score card, which ranks Asso-
ciated Banc-Corp, Banc of California, In-
vestors Bancorp, and Triumph Bancorp as
the most likely consolidation candidates in
our coverage, as well as our inaugural po-
tential buyers list, with The Bank of N.T.
Butterfield & Son, Pinnacle Financial Part-
ners, First Interstate BancSystem, and
PacWest Bancorp heading the results.
—JAREDSHAW AND TEAM
Interest-Rate Tug of War
Market Blog
LPL Financial
lplresearch.com
Feb.23:Our base case is that interest rates
will continue to rise due to increasing
growth and inflation expectations and, even-
tually, Fed normalization. We believe that
yields will continue to move higher through-
out 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 eq-
uity markets or the real economy. A number
of consumer loans are influenced by the lev-
els of the U.S. bond market, most notably
mortgage rates. A more interesting ques-
tion, 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 no-
tably 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 push-
ing yields higher, while the prospects of po-
tential Fed intervention and increased sav-
ings 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?
—RYANDETRICK
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”Investorsmayultimatelyview2020astheyearwhenDemocratsbrokeawayfrompost-Reagan
orthodoxyandtheFeddecidedVolcker’svigilancewasnolongerrelevant.”—MATHIEUSAVARY, BCA Research
This commentary was issued recently by money managers, research firms,
and market newsletter writers and has been edited by Barron’s.