Market Perspective: Contrarian’s Dream

It’s a contrarian’s dream come true.Contrarian investors like to buck the trend. They buy when other investors are selling and sell when others are buying.

Last week, Bank of America (BofA) delivered a contrarian’s dream. BofA’s monthly survey of 225 global asset managers, who are responsible for $645 billion in assets under management, showed the managers were almost fully invested, according to CNBC.

The survey showed asset managers’, “…cash levels at the lowest since March 2013, global equity allocations at a 10-year high, and a record number of respondents we are taking a ‘higher than normal’ level of risk,” according to Randall Forsyth of Barron’s.

The optimism of these Asset managers’ clearly reflects central banks’ monetary policies, governments’ fiscal stimulus programs, and positive signs of economic recovery.

• Central bank actions are supporting low interest rates. Low interest rates encourage economic growth by making money inexpensive for companies and individuals to borrow. In the United States, the real (adjusted for inflation) 10-year Treasury yield finished last week at -0.80 percent, according to the U.S. Treasury.
• Government stimulus is flooding world markets with cash. “Although percentage cash levels held by investment managers are falling, they are not falling fast enough to keep up the rapid expansion of money still flooding the system…U.S. household savings at the end of 2020 were still almost $1 trillion above pre-COVID levels…,” according to Mike Dolan Reuters.
• Economic recovery is gaining steam. While the virus continues to be a risk, last week much of the economic data in the United States was positive. Retail sales exceeded expectations and manufacturing held steady, according to Nicholas Jasinski of Barron’s. Reuters says Economic Growth is forecast to be about 6 percent in 2021.
• The Commerce Department reported that 4Q20 GDP rose at a rate of 4.1%. Consumers did their part in a big way, contributing 60.8% of core demand (personal consumption expenditures, equipment and intellectual property spending, housing, exports and government expenditures). This is in line with the 10-year average. It is our thesis that U.S. GDP will recover to pre-pandemic levels by the end of 2021, but sectors will most likely recover at different paces.
• Yesterday Stocks fell on Thursday morning, reversing Wednesday’s gains, following mixed earnings reports and new employment data. The Labor Department said that first-time claims for state unemployment benefits fell to 730,000 for the week ended February 20, down from a revised 841,000 a week earlier and below the Bloomberg consensus forecast of 825,000.

Yield Curve Widening

Interest rates at the long end of the yield curve have risen sharply and we anticipate they will head modestly higher over the next few quarters. The curve (2yr/10yr spread) has steepened from 82 basis points at the start of the year to 145 basis points. While the Fed will focus more on unemployment than inflation, and has pledged to keep short-term rates low, it has less influence over the long end of the yield curve. Bond investors at the long end of the yield curve are concerned inflation may spiral out of control, especially if Congress rolls out another massive spending plan. The rising long-term interest rates and steepening yield curve hold several implications for investors. One, higher rates raise valuations on equities, and this has caused the stock sell-off over the past few days. But the steeper yield curve also signals the U.S. economy may be rebounding sharply in a few months. And the wider spread between short-term and long-term bonds is beneficial for most of the Financial Services sector.

Technical Perspective:

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