Morning Notes — Bond Prices in Developing Bear Market

Today: Biden’s ~$1.9T fiscal stimulus plan was already priced into markets and today’s sell-the-news reaction fits our preview from Wednesday.  Fiscal spending expectations drifted beyond realistic levels in aftermath of Georgia’s Senate run-offs and need to unwind further.  Today’s dose of reality has bond yields and cycle/value stocks lower, which also fits our preview after 10-year yields failed to break technical resistance at ~1.16% Tuesday.  Expect this to be a short-term pullback in yields only (support in the ~0.98-1.00% range) before resuming the prior trend.  To be clear, our forecast for higher bond yields and cycle/value outperformance isn’t contingent on further increases in fiscal spending. 

What? The recent increase in semiconductor demand has come from almost all end markets.  The increased demand coupled with an incomplete recovery in the supply chain has lengthened delivery cycles from ~2 months to ~6 months and prices are higher as a result.  Other commodities are facing similar demand/supply imbalances.  Soybean and corn prices have increased >20% since mid-December.  Global soy stocks/use ratio is now less than 2.5 days, down from an average of ~15 days, lifting all grain and fertilizer prices into the spring planting season.  And when deep-cyclical companies get volume and price, nearly 100% of the increase falls to the bottom line.   

SPX: The S&P 500 is short-term overbought and equity sentiment is at bullish extremes.  The environment calls for near-term caution, but we look to add cyclical/value exposure as bond prices look like they’re in the early innings of a developing bear market.