Stocks marched higher during the past three months, marking the fifth consecutive quarterly advance since the pandemic-induced crash last year. Value stocks continued their upward momentum but did give up some of their gains relative to growth stocks in June.
Bond yields are sending an economic warning as this past week 10-year Treasury yields dropped back to 1.3%. With the simultaneous surge in the dollar, there is rising evidence the economic “reflation” trade is getting unwound.
“Warnings From Behind The Curtain” almost sounds like the title of a good “Cold War” fiction novel. However, this time, the story is of warnings for investors not often discussed by the mainstream media.
Debates continue to run rampant during the last six months of the London Interbank Offered Rate (LIBOR) benchmark. Some think the Secured Overnight Financing Rate (SOFR) benchmark is the perfect unitary solution. Meanwhile, others believe that a multi-benchmark environment is best. As a result, uncertainty, confusion, and opinions have started to muddle the path of “Life after the LIBOR”.
Currently, depending on whether you are “bullish” or “bearish,” there is much angst over the prospect of higher inflation. If you are bullish, higher inflation is a reflection of surging economic growth. If you are bearish, higher inflation leads to rising costs and higher rates. However, we need a better definition of what inflation is.
May kicked off with a stunning miss on the previous month’s employment report which came in at a disappointing 266k and confirmed recent anecdotal evidence from across the economy that if the government incentivizes its labor force to stay home, it will do just that.
The most considerable risk to markets has naturally started to shift as COVID-19 uncertainty fizzles out. Inflation, monetary policy shifts, and accelerated economic recovery have emerged as the refocused market risks.