Weekly Investment Update (06/18/2021)

Jun 18, 2021

Fed Begins to Talk About Talking About Tapering 
At the June FOMC meeting, Fed officials reiterated their view that the recent uptick in inflation is likely to be largely transitory with Chairman Powell highlighting the recent rise in airline prices, used cars, hotels, and lumber as key drivers. Still, they acknowledged that inflation data is running hotter than expected and noted that they are cognizant of the upside risk, stressing they would respond accordingly if inflation proves to be more persistent than anticipated. Fed expectations point to headline and core PCE at or above 3% this year but then decreasing to around the goal of a 2% average inflation rate. 

Unsurprisingly, Chairman Powell admitted the Fed has started to talk about talking about tapering, marking the first time the Fed discussed tapering since the recession began. No timeline for tapering was presented as he noted that the U.S. economy was still not at the point of “substantial further progress” that might prompt policy action. Fed officials made it clear they would like to see further labor market improvement prior to decreasing the size of monthly asset purchases. Most likely this tapering would precede actual rate hikes. 

At the meeting, the Fed also moved forward the date they anticipate raising interest rates. The updated Fed dot plot, which shows predictions of future fed funds rates, notably showed two hikes of the federal funds rate in 2023, an increase relative to the March 2021 meeting, which showed no rate changes in 2023. The FOMC members continue not to expect any rate changes this year, and most do not expect one or more rate hikes next year either. 

U.S. Yield Curve Flattens; Investors Rotating Toward Growth-Oriented Stocks
Bond and equity markets responded to the Fed meeting with notable moves both across and within asset markets as the yield curve flattened, some investors sold inflation hedges, and others rotated from value toward growth stocks. 

With the Fed indicating that two rate hikes may occur by 2023, short-term rates were pressured upward. Meanwhile, the tempering of longer-term inflation expectations put downward pressure on long-term rates. As a result, the yield curve flattened. Specifically, the two-year rate now sits above 0.20% for the first time in over a year. The 10-year yield is around 1.50%, below its year-to-date high of 1.74%. Notably, the 30-year bond yield declined to 2.1% on Thursday, which is its lowest level since February. 

On the equity side, yield-curve-sensitive financials sold off alongside industrials and materials, a continuation of a trend seen in recent weeks as investors have been shifting away from cyclicals and back toward growth. This is a reverse of the shift seen earlier this year, where reopening and relations trade boosted cyclical stocks. Now, much of the news on the reopening and concerns about inflation may be in asset prices, and in the last few weeks investors again are focusing on relatively attractive opportunities in the growth-oriented space. 

Financial Stocks Retreat With Banks Under Pressure
Financial stocks have declined in recent weeks with banks especially coming under pressure during the recent rate move. On Thursday, the KBW Bank Index touched its lowest point since April. A variety of factors are skewing bank sentiment negatively, including a flatter yield curve and softer loan growth.

Several large banks, including J.P. Morgan and Citigroup, released negative near-term updates at a recent banking conference. J.P. Morgan’s lower net interest income forecast surprised investors, and bank chiefs warned of muted loan demand. Leaders of several banks described an environment in which borrowers still flush with stimulus cash are paying down balances and are not requesting more financing. Additionally, bank trading revenue is expected to return to more normalized volumes after government stimulus, Federal Reserve intervention, and heightened volatility helped boost levels last year.  

Despite recent underperformance relative to the S&P 500, the S&P 500 Banks Index has gained over 23% this year, making it one of the best-performing industries year-to-date. 

Steady Positioning Amid Continued Crosscurrents 
Reopening a global economy with a new mix of monetary and fiscal policy has kept markets reasonably volatile this year. We view it as a medium-term positive that the Fed is acknowledging some uncertainty in the inflation outlook and that it will be responsive to ongoing developments. With the growth backdrop still extremely robust, even if the Fed turns slightly less accommodative, we continue to see compelling opportunities in equities and are comfortable with a modest overweight position. At the same time, we believe inflation expectations should remain stable with the Fed communicating more actively on recent developments. That should keep the backend of the rate curve anchored and more generally reduce volatility in bonds, which remain an important defensive part of most client portfolios. 

Within Bessemer’s equity portfolios, we maintain an overweight to more growth-oriented companies, though we have increased our cyclical exposure since the start of the year. Bessemer’s all-equity portfolio is slightly underweight financials, with financial companies representing 12% of portfolio holdings relative to 15% for the benchmark. Information technology remains a core part of the portfolio, with technology companies representing 24% of holdings relative to 20% for the benchmark. 

 

 

— Bessemer Investment Team

 

 

Past performance is no guarantee of future results. This material is provided for your general information. It does not take into account the particular investment objectives, financial situations, or needs of individual clients. This material has been prepared based on information that Bessemer Trust believes to be reliable, but Bessemer makes no representation or warranty with respect to the accuracy or completeness of such information. This presentation does not include a complete description of any portfolio mentioned herein and is not an offer to sell any securities. Investors should carefully consider the investment objectives, risks, charges, and expenses of each fund or portfolio before investing. Views expressed herein are current only as of the date indicated, and are subject to change without notice. Forecasts may not be realized due to a variety of factors, including changes in economic growth, corporate profitability, geopolitical conditions, and inflation. The mention of a particular security is not intended to represent a stock-specific or other investment recommendation, and our view of these holdings may change at any time based on stock price movements, new research conclusions, or changes in risk preference. Index information is included herein to show the general trend in the securities markets during the periods indicated and is not intended to imply that any referenced portfolio is similar to the indexes in either composition or volatility. Index returns are not an exact representation of any particular investment, as you cannot invest directly in an index.