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
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