The past few weeks have confirmed our concern that this is the most interest rate-sensitive stock market in history, cautions Jim Stack, a money manager known for his "safety-first" strategy, and the editor of InvesTech Research.
While Federal Reserve officials have continued to reassure markets that no rate hikes are on the horizon, the unexpected rise in longer-term bond yields is having a clear impact.
In barely two months, the 10-year Treasury yield has risen more than 0.6% to 1.55%. That's a relatively small increase by historical standards, but surprisingly large considering 10-year yields started the year near 0.9%.
In our view this doesn't necessarily mark the end of the bull market, but it does emphasize the importance of managing risk. And we suspect Fed Chairman Powell will quickly move to try to calm bond holders and nudge long-term rates lower.
A driving force behind rising long-term yields is the expected economic emergence from the COVID-19 pandemic and the pent-up demand that is already showing in select areas.
One key area lies in commodity prices and manufacturing, where the ISM Manufacturing Survey has risen to one of the highest levels in the past three decades. That's good news for the economy, but potentially not-so-good news for investors.
For along with that manufacturing strength has come a dramatic rebound in underlying inflationary pressures as measured by the ISM Prices Paid Index. Now at the highest level since 2008, if these pressures remain high, they could derail the Fed's reassurance of "no interest rate increases" sooner than promised.
Strategy: With the rise in T-bond yields and early signs of technical weakness, there’s a lot that’s catching our attention. We remain prepared to make adjustments to the Model Fund Portfolio if further warning flags develop. Meanwhile, we have initiated a position in the SPDR MSCI ACWI ex-U.S. ETF (CWI).
This fund provides diversified exposure to the international equity market, excluding the U.S., and is an opportunistic way to invest in the post-pandemic economic recovery while addressing overvaluation with inflation risks. Overall, our Model Fund Portfolio continues to maintain a defensive 20% cash reserve.