The month of August saw an increase in the number of COVID-Delta variant cases, a botched withdrawal from Afghanistan with legitimate questions about the competence of leadership in a number of areas, several hurricanes, and further record highs in the S&P 500 index.

To be clear, this is not a political statement.  Too often investors get hurt when they ignore reality and do not confront “what is.”  For the record, over the years we have been equally critical of both sides of the aisle when the facts dictate. 

Despite the headlines, the S&P 500 gained 2.8 percent in August to close above 4500 for the first time in history.  The yield on the 10-year U.S. Treasury inched up to 1.30 percent, while the price of a barrel of West Texas Intermediate oil fell roughly 6.5 percent for the month after being down more than 15 percent mid-month. 

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The S&P 500 index rose 2.2 percent and recorded another all-time high in July notwithstanding a significant uptick in volatility as the COVID-Delta variant has caused the number of new cases to rise. Uncertainty about the government’s response, including whether we will be subject to new restrictions, weighed on the markets.

The S&P 500 experienced its worst and best one-day performance since March on back-to-back days in July. Although the number of COVID cases are on the rise, the number of fatalities has remained relatively low compared to last year.

The yield of the 10-year U.S. Treasury Note fell to 1.24 percent at the end of July, down from 1.45 percent at the end of June and 1.74 percent at the end of the first quarter. This action seems to be counterintuitive given that inflation, according to the core personal consumption expenditures (PCE), rose 3.5 percent year-over-year, the highest since 1991.

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The S&P 500 index recorded another all-time high as the accommodative monetary policy from the Federal Reserve helps the post-pandemic economic recovery gain traction. Although stocks have been one of the primary beneficiaries, the combination of Fed liquidity and the economic re-opening is causing inflation to rise. For example, crude oil prices were roughly $75.50 a barrel at the end of June, up from around $48.50 at year-end. As a result, interest rates on 10-year U.S. Treasury securities, which were trading at a yield of 0.93 percent at the end of December, were recently yielding 1.45 percent.

TJT Capital Group’s InVEST Risk Model ® has helped our clients participate in bull markets and protect capital from the devastation of bear markets by focusing on 5 indicators that really matter when it comes to determining the health and direction of markets.  The following is the most recent update.

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The S&P 500 index rose just over 0.5 percent in May and recorded a new all-time high despite a pick-up in volatility due to rising tensions in the Middle East, a computer hack of a major oil pipeline, a meaningful jump in inflation figures, and a significant selloff in cryptocurrencies, including Bitcoin.

The Consumer Price Index (CPI), excluding food and energy prices, increased 4.2 percent year-over-year, the fastest increase since 2008. The Federal Reserve’s preferred inflation gauge, Personal Consumption Expenditures (PCE) excluding food and energy, increased 3.1 percent year-over-year.

And while oil prices are excluded, they have risen from well below $40 a barrel one-year ago to more than $66 a barrel at the end of May. Regardless of any inflation index, higher food and energy prices act as a tax and are creating some headwinds.

While housing has been strong over the past year, it has cooled a bit as both new single-family houses sold and pending home sales have declined over the past one-month and three-month time frames. Moreover, consumer confidence has slipped over the past few weeks.

When the employment report was released on May 7, 2021, the consensus was for 950,000 to 1 million new jobs. The number of new jobs came in at 266,000 and the unemployment rate actually rose from 6.0 percent to 6.1 percent, a big disappointment. Moreover, the number of new jobs initially reported in April were reduced by 78,000. When asked if the exceptionally generous unemployment benefits had something to do with the low new jobs’ figures, Treasury Secretary Janet Yellen said “I don’t think that the addition to unemployment benefits is really the factor that’s making a difference.”

It seems as though Janet Yellen, whose specialty is labor economics, is at best being intellectually naive and at worst less than honest. We say that because the next business day President Joe Biden threatened to take away unemployment benefits when he said “We’re going to make it clear that anyone collecting unemployment, who is offered a suitable job must take the job or lose their unemployment benefits.”

Moreover, the Federal Open Market Committee minutes from the April 2021 meeting stated that businesses were having trouble hiring workers because of factors such as “expanded unemployment insurance benefits.” The reality is that some states offer weekly unemployment benefits of as much as $855 before the additional $300 in Federal assistance, which equates to being paid more than $45,000 a year not to work.

However well-intentioned the relief programs have been, we are seeing second and third order effects. While Joe Biden has been very careful to follow the script – not a political comment but an observation – occasionally he improvises. Following the employment report, he said “I know there has been a lot of discussion since Friday’s since Friday’s report (SIC) that people are being paid to stay home rather than go to work. Well, we don’t see much evidence of that. That is a major factor.” (Emphasis added)

TJT Capital Group’s InVEST Risk Model ® has helped our clients participate in bull markets and protect capital from the devastation of bear markets by focusing on 5 indicators that really matter when it comes to determining the health and direction of markets.  The following is the most recent update.

Click here to read the full report.

Stocks, bonds, and commodities rallied in April as the U.S. economy continues to recover from the COVID-19 shutdown as more people are getting vaccinated every day. Pent-up demand along with additional stimulus checks and increased optimism about a post-pandemic world are causing numerous records to be broken. Of course, much of this is just the mirror image of records that were broken to the downside one-year ago.

The S&P 500 index rallied 5.2 percent in April as a majority of corporate earnings have come in better than expected. The yield on the 10-year U. S. Treasury Note dropped to 1.65 percent at the end of April from 1.74 percent at the end of the first quarter, and a barrel of West Texas Intermediate oil rose to roughly $63.65 from almost $59 a month ago.

Not everything was rosy, however, as losses from the massively-leveraged bets-gone-wrong by family office Archegos became public. In total, a few of the biggest global banks lost more than $10 billion as those trades were unwound. While the industry initially touted that this type of behavior was not widespread, some honest reports referred to the losses as a “surprise.” The good news is that this event happened in a healthy market with plenty of liquidity. The bad news is that this is an example of late-cycle behavior comprised of massive leverage in complex and opaque instruments.

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From our April 2, 2021 issue of On Our Radar

For more than eight years (2012 – 2020) inflation was running below the Fed’s target of 2 percent. When asked about below-target inflation, the Fed’s response was the same; it was “transitory.” Consider the following:

“Inflation has been running below the Committee’s longer-run objective of 2 percent for some time and has been a bit softer recently. The Committee believes that the recent softness partly reflects transitory factors.” Chair Ben Bernanke June 19, 2013.

“As these transitory influences fade…the Committee expects inflation to rise to 2 percent over the medium term.” Chair Janet Yellen December 16, 2016.

“Core inflation stood at 1.6 percent for the previous 12 months. We suspect some transitory factors.” Chair Jerome Powell May 1, 2019.

However, after years of believing in their inflation theory and disregarding actual evidence, the Fed officially changed its monetary policy in September 2020 to address the below-target inflation. In fact, the Fed adopted flexible average inflation targeting. Since then, interest rates on the 10-year U.S. Treasury Note have more than tripled to approximately 1.7 percent.

What is interesting is that the median inflation projection of the FOMC participants is 2.4 percent in 2021, well above the current yield on longer-term U.S. Treasury securities. While it’s possible that the Fed is right and any inflation above 2 percent will be temporary – the 10-year inflation indexed security is still negative as seen below – it is also possible that the bond and stock markets may be tested by the highest level of inflation in many years.

This is something we are watching closely.

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It was one year ago that the global economy and financial markets were devastated by the onset of the COVID-19 pandemic. Coordinated responses by global central banks and governments flooded the markets with numerous liquidity programs in an attempt to offset the impact of forced lockdowns. Meanwhile, researchers and pharmaceutical companies went to work to develop a vaccine, which they did in record time.

While economies around the globe continue to gradually reopen, the markets have seen a tug- of-war of late as money has shifted from COVID beneficiaries – work from home, school from home, e-commerce, etc. – to those industries hit hardest from the shutdown, primarily the travel and leisure sectors due to social distancing.

The first quarter saw materially higher interest rates on the 10-year U.S. Treasury Note, higher oil prices, a blow-up in at least 2 hedge funds (1 a ‘family office”), and a ten percent correction in the NASDAQ Composite. Nevertheless, the S&P 500 index went on to record another record high.

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The S&P 500 index gained 2.6 percent in February even though the markets became increasingly volatile over the last week of the month as interest rates on the 10-year U.S. Treasury Note rose to the highest level in more than a year.  As vaccine rollouts have increased, the equity markets have seen a rotation out of a number of COVID-lockdown “winners” into those areas hardest hit such as energy, travel, and leisure companies that stand to benefit from the re-opening of the economy.

The 10-year Treasury yield rose to 1.44 percent at the end of February from 0.93 percent at year-end and a low of 0.52 percent in August 2020 as seen in the following chart.  While interest rates are still quite low on a relative basis, the rate of change has been significant as the yield has nearly tripled in about 6 months.  To put that move into context, the price decline on the 10-year Treasury is equivalent to roughly seven years’ worth of interest income.  

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January 2021 had a lot of drama, both politically and in the financial markets, with events that may have repercussions for some time.  On January 5th, the state of Georgia had two Senate runoff elections which gave the Democrats and Republicans a 50-50 split, with the tiebreaker going to Vice-President Kamala Harris.  The next day there was a clash at the Capitol Building as the Electoral College was in the process of certifying the Presidential election.  As a result, the House of Representatives issued an Article of Impeachment against former President Donald Trump. 

Later in the month the markets came under pressure due to intense “short squeezes” in a number of heavily “shorted” stocks – issues that were sold in the hope of buying them back at a lower price.  As you will see later, the substantial movement in a few stocks caused leverage in some hedge funds to be reduced, thereby putting pressure on the major averages.  As a result, the S&P 500 index fell 1.1 percent for the month after registering another record high.

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