It’s been a strong start to 2021 for equities, while bonds have been hammered. Reflation trades have prospered in the wake of the Democrats taking the presidency and both houses of Congress, underpinning expectations for massive stimulus measures, and especially when combined with vaccine developments. Overall, we believe that the US equities will continue to be bullish for at least the first part of this year, but are very worried about a market drop due to all the pumping of the economy and spending.
The major indexes all closed at fresh records on Friday with the Dow at 31,097, the S&P 500 at 3824, and the NASDAQ at 13,201. However, the surge in virus cases and more restrictive lockdowns will be a headwind this quarter.
Investors should be worried about the energy sector, specifically oil because demand will dramatically decrease and it is has increased substantially more than equities in the last quarter. Looking at the chart above we can see an increase of 11.33% for the S&P 500 compared to Oil of 26.30%. A 10% correction in pricing for oil sector MLPs and stocks could be coming soon.
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Take for example Exxon Mobil stock (NYSE: XOM). Looking at this chart of Exxon Mobil (XOM), you can clearly see how closely correlated Exxon Mobil’s stock XOM (chart bars) is to oil prices (orange line). It also shows the S&P 500 dramatically below both oil and XOM. The lockdowns and also a Democrat policy against oil will likely cause both a short term and long-term bearish trend.
Meanwhile, price pressures have been emerging that are weighing heavily on bonds and yields are now at their highest levels since the early last year with the wi 10-year at 1.115% and the wi bond at 1.880%.
Today’s docket is light with just the record $58 bln 3-year auction to kick off the $120 bln in coupon sales. The wi cheapened to 0.235% on Friday. Auction demand has been sketchy in recent months and it’s possible that buying will be limited, even at the cheaper rates, amid expectations of heavy supply ahead given the hefty stimulus under the Biden agenda. Atlanta Fed’s Bostic speaks on his economic outlook. There is a heavy Fedspeak calendar this week that includes Chair Powell and VC Clarida. Data picks up later in the week and will include CPI, PPI, retail sales, industrial production, and the Empire State index.