2021 is set for a Global Economic Boom – the best in 50 years. The boom will stimulate a Great Rotation, including a bear market in US Treasuries (UST) – the first in 40 years. This will lead to a Golden Age for asset allocation. The boom is imminent, the UST bear market is upon us, and asset allocation is key.
We have recently witnessed the Covid speed model. This is global intellectual and financial capital focused on a single issue, leading to unprecedented outcomes. Covid demonstrated this with the multiple effective vaccines in one tenth of the normal time. The model will lead to a paradigm shift in investing as it is replicated across global challenges, like climate, cyber, and fintech/crypto, creating new opportunity sets accessible via thematic investing.
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Summary
- A coming economic boom favours rotation out of bonds and Big Tech towards non-US and cyclical/value stocks.
- The recent rates selloff is likely running out of steam.
- The risk scenario is for a sharp move in US yields to 2% which could see a broader S&P 500 correction.
2021 is set for a Global Economic Boom – the best in 50 years. The boom will stimulate a Great Rotation, including a bear market in US Treasuries (UST) – the first in 40 years. This will lead to a Golden Age for asset allocation. The boom is imminent, the UST bear market is upon us, and asset allocation is key.
We have recently witnessed the Covid speed model. This is global intellectual and financial capital focused on a single issue, leading to unprecedented outcomes. Covid demonstrated this with the multiple effective vaccines in one tenth of the normal time. The model will lead to a paradigm shift in investing as it is replicated across global challenges, like climate, cyber, and fintech/crypto, creating new opportunity sets accessible via thematic investing.
The dramatic fixed-income upheaval over a likely transitory pick-up in inflation in coming months comes after the consensus rate call for US 10-year yields at the start of the year was 1.2% for end-2021. This could go down as one of the sell-side’s worst predictions. My own target is 1.75-2.0%.
It is also worth noting how many folks have been complaining about how markets are not ‘free’ – that the Fed controls everything. And yet when Fed Chair Jay Powell does not stop too rapid a rate rise, they complain about the lack of Fed leadership.
Understand this: the Fed is happy to see rates rise – it is even happy with some inflation (remember average inflation targeting?). Benign financial conditions and elevated unemployment numbers suggest that this will be the case for some time. Watch the Fed’s 17 March meeting for an economic outlook update.
At this point, a bond-duration-related, growth-equity correction seems pretty far advanced. Indeed, the combination of vaccines and rising rates is kryptonite for Big Tech. Bond markets have now priced in three rate hikes in 2023, while Nasdaq is in correction territory. The high-flying names have been truly blasted – Tesla is down four weeks in a row for the first time in nearly two years, while the popular ARK Innovation ETF (ARKK) looks to be falling to its 200-day moving average.
The clean energy thematics have been caught up in the wash, more so than expected. Many are now off 30% from recent highs, while on the crypto front, GBTC sells at a 15% discount to BTC compared with a 30% premium a month or so ago. The large embedded gains in many thematics have sustained the selling pressure.
It is safe to say that the past decade’s US equity domination, led by large cap growth tech, is over, and the ascent of non-US equity, cyclical/value is underway. The Innovation Age is upon us and will remain the alpha opportunity set in the coming years.
Can one expect a ‘sell the inflation rumour and buy the news’ market going forward? Higher rates now inoculate against the inflation pick-up coming from the exit of last year’s negative inflation numbers. 1.5% on the 10-year is a much better rate than 0.9% and reflects good news across multiple fronts. Higher rates are a good thing and far preferable to the opposite. Like Icarus, they can fly too high too fast, and that seems to be where we are today.
Could the next move be a rally in the US 10-year? The 2s10s yield curve is now almost as steep as during the infamous 2013 Taper Tantrum, suggesting that much ground has been made up. A rally is possible given resistance levels around 1.5-1.6%, the upcoming Fed meeting, and attractive hedged yields for non-US buyers coupled with a massive short futures position with borrowing costs near record levels.
The opacity in the bond market combined with its interlocking nature makes determining an all-clear difficult. A continued rapid rise towards the 2% level on the 10-year would imply broader equity selling pressure that could lead to a correction in the S&P 500 where even the cyclical plays get hit. Sizing and positioning among the long-term secular themes amid a significant equity style/factor rotation, the biggest economic boom in 50 years, and a UST bear market is likely to remain a challenge.
Bottom line: a bond rally would equal a growth stock rally; a straight shot to a 2% in US 10-year yields would imply a broader equity selloff to include the S&P 500 and cyclical/value plays.
Jay is the founder of TPW Advisory and former top ranked head of asset allocation at Morgan Stanley.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)