Morning Notes

Sharply higher bond yields has been the identifiable risk for equities since the 11/9 PFE/BNTX vaccine data. Over the last ~20 years, the majority of equity market corrections were preceded by a sudden rise in bond yields.

Our preference to add cyclical/value equity exposure (Industrials, Materials and Financials) was initially based on real yields bottoming back in mid-September. It was an unpopular position in mid-September, but not anymore.

Yesterday, the 5-year/30-year yield spread cleared technical resistance at ~143bps on rising expectations for Democrats to use the budget reconciliation process in order to ‘go big’ on fiscal stimulus.

Better-than-expected US economic data plus an improved vaccination pace argue against additional large-scale fiscal relief at this time but it sounds like it’s going to happen anyway.

Rising expectations for large-scale fiscal stimulus and US vaccination progress are resulting in higher yields and curve steepening. Democrats sound like they’ll use the reconciliation process to pass a ‘fiscal rescue’ package close to $1.7T and the US is vaccinating more people per day than

Q4 earnings season is trending better than expected with ~85% of S&P 500 companies beating consensus earnings vs. an average of ~70% over the last four quarters.  Revenues are also better with ~79% ahead of estimates vs. an average of ~61% over the last four

Overnight vaccine headlines may not read universally positive, but bond yields are higher and the curve is steeper post-release.  Ten-year Treasury bond prices have successfully completed their 2 week-long counter trend rally with yields bouncing off support at ~0.98% on Wednesday (now 1.077%).

The coordinated short-squeeze in GME and others from Reddit’s blog posts forced a mechanical de-leveraging yesterday, which led to the third largest-ever increase (+61.6%) in the CBOE Volatility Index (VIX).

In the short-run, markets are influenced by fundamentals, sentiment and positioning.  In the long-run, markets are only interested in fundamentals and we generally use the other two inputs as contrarian indicators at extremes. 

The move lower in 10-year Treasury yields has created an opportunity to add cyclical/value equity exposure. Bond yields have significant support (price resistance) in the 0.98%-1.00% range (now ~1.03%) and the S&P 500 Value Index has significant support in the 1265-1255 range (now 1287).