During the first two months of 2021, stocks climbed in anticipation of accelerating vaccine rollouts and anther round of stimulus. The adage is to buy the rumor and sell the news, but equities advanced again in March as vaccination opened to more people and stimulus checks were sent out. Discussion of yet another massive spending bill, this time aimed at infrastructure, likely also helped.
Treasury Yield Climbs
Bond prices declined as mounting debt concerns prompted investors to demand higher rates. The ten-year Treasury yield finished the month at 1.74%, up from 0.93% to start the year. While still low, this was a sizable increase for one quarter and highlighted the risks of bond portfolios concentrated in longer maturity issues.
Vaccine Optimism Impacts Trading
Higher yields and vaccine optimism led to a further unwind of the “stay at home” trade, with physical economy value stocks outperforming growth in general. Some of the trendiest companies among day traders suffered meaningful losses. Interest rates play a role in this emerging trend because many growth stocks have little or no profits now, but high anticipated future earnings, the present value of which is degraded with higher rates.
A Word on the New Spending Bill
On the final day of the quarter, President Joe Biden announced his vision for a $2.3 trillion infrastructure project, which is intended to be funded largely by higher corporate tax rates. This tax increase would immediately reduce the shareholder value of company earnings. Stocks rose the day the plan was announced, in part because tax changes are already widely anticipated, but we believe the impact of corporate tax hikes remains a considerable headwind markets will have to overcome. The legislation is likely to change before passage, but it appears the mountain of debt will continue to grow.