Stocks are quiet to start the week as traders are waiting on the March Fed meeting that starts tomorrow. It's much ado about nothing as the Fed will likely say what they've been saying for months: the economy is growing again (good news), inflation is nothing to worry about (good news) and the Fed will do whatever it deems appropriate to support growth (more good news). As Jim Cramer says, don't fight the tape and [definitely] don't fight the fed! Any dip lower on the news is just a knee jerk reaction to inflation fears and rising rates. The economy being "too hot" is not a problem folks.
Currently, the Fed is buying $80bn of Treasuries and $40bn of mortgage-backed securities each month in response to the economy shutting down during the pandemic. This won't change anytime soon and has the net effect of keeping rates low and propping up the economy short-term. From a Macroeconomics point of view, this is normal and what the Fed does during times of extreme financial distress. From a common sense point of view, where in the heck are we coming up with all that money!!?? Answer: We're borrowing it at very, very low interest rates so for the time being, we're good (from a Macroeconomics point of view).
Trillions of dollars in stimulus have also come into play as Govt spending heats up. This has resulted in a selloff of Treasury securities and concurrently rising interest rates . You can see this phenomenon in the chart below of #IEF, the index fund that tracks 7-10yr Treasuries. As we know from technical analysis, this is a downward channel with the added effect of a broadening falling wedge. Ouch! Prices, however are converging at the low end of the band and should find support levels around this point.
Prices of Treasury bonds (or any bond for that matter) go in opposite direction of its yield so as interest rates rise, bond prices fall. You can see from the chart below the fall in prices has been spectacular so don't believe anyone who says "bonds are safe." Yeah, right.
The Fed wants inflation. The Fed wants full employment. The Fed wants growth. So there will be no change to the plan at the meeting this week. And that will likely mean, rates go higher, bond prices go lower and stocks are stuck in the middle but...
The way forward looks good, really good. Stocks will likely continue to outperform and specifically, those that benefit from a reopening of the economy: financials, industrials, energy. Not so sure? Just check out the charts of these 3 sectors below and compare them to the treasury bond chart above.
XLF - Financial Sector
XLI - Industrial Sector
XLE - Energy Sector
Now, where do you want to be invested? The flight plan is clear. Let's follow it! ✈️