A combination of stronger economic growth, declining interest rates, and expectations that the economy will get even better pushed the U.S. stock markets to another set of record highs this week.
As fears of higher bond yields continue to fade, sectors that do well under lower interest rates took off this week. Commodities in general came back in favor and even the greatest laggard of all—gold—saw some fresh demand. That’s right, the precious metal I least favored at the beginning of the year actually came to life, although it has a long way to go before recapturing its former luster.
Oil, copper, silver, foods, platinum, and palladium and rare earths did well, as did large cap stocks led by technology. The drop in yields, especially the yield on the benchmark U.S. Treasury Ten-Year bond (The Ten), gave investors the confidence to commit to even more capital to sky-high equity markets. Two weeks ago, The Ten was trading at 1.76%. Today, it changes hands at a yield of 1.58%. That may not seem like much of a decline, but when you are talking about trillions of dollars of bonds, it is a nice piece of change–if you are on the right side of the trade.
The markets have been resilient, despite some of the news flow. The suspension of the Johnson & Johnson coronavirus vaccine, for example, set the market back a few points, but for less than a day, before regaining its stride. The increasing rate of Covid-19 cases didn’t seem to deter investors either. I believe that is largely because businesses continue to open despite the increase in cases.
On Thursday, the weekly jobless claims plunged to a fresh pandemic-era low, while month-over-month retail sales surged by 9.8%. The hard-hit food and drink services area, for example, was up 13.4%. Clothing store sales were even higher by 18.1%. The combination of government stimulus checks and the easing of social distancing standards were the main drivers behind these one-off gains.
Investors should not expect these kinds of stellar numbers next month. I expect the April 2021 data will see a drop off in growth, because some of the stimulus cash will have been spent. Overall, however, consumption should continue to rebound as the vaccination rollout gathers more steam, more workers return to work, and consumers grow confident in the economy and in their own circumstances.
Amid all of this good cheer, investors also entertained the public debut of Coinbase, the seventh largest new listing of a company in the market’s history. At the close of trading on that first day, Coinbase (COIN) was worth just over $61 billion. At that valuation, it ranks among the giants of the financial services business. This is all the more remarkable if one considers its business—it is a cryptocurrency exchange.
Last year, I wrote that investors should take cryptocurrencies seriously, and that the asset class was here to stay. At the beginning of the year, I numbered crypto as one of the financial areas I believed would do well this year. Since then, Bitcoin has doubled and other currencies, such as Ethereum and Litecoin, have done even better. To me, this area will do even better in the future. As more institutions and individuals embrace the concept, I believe the price of these assets will inevitably rise—but not in a straight line. I expect we are seeing another short-term peak in crypto currency prices right now. If you decide to dip your toes into these waters, be prepared to buy and hold and suffer some really sharp losses from time to time.
As for the markets overall, I wouldn’t be surprised if they experienced a bout of profit-taking next week. Things seem a bit on the frothy side right now, but don’t panic. I still expect higher highs in the weeks ahead.
Any mention of specific securities or investments is for illustrative purposes only. Author makes no representations that any of the securities discussed have been or will be profitable.