Moving Higher

One year ago, we were all trying to come to grips with what a “global pandemic” meant and what the economic, investment and certainly not least of all, health ramifications were in such an environment. Now, equally puzzling is the attempt to accurately predict what a global pandemic recovery looks like.

We believe the global recovery will be uneven – those countries which have been able to procure and administer vaccines are manifesting a more positive economic and health outlook. While that may sound like simple common sense – it is of great interest to see which countries efforted to gain access to vaccines and which seem to have been seemingly unprepared for obtaining vaccine help. For all the politicized rhetoric, there is praise to be handed out to both the former and current administrations for their efforts to obtain vaccine supply and to get the supply distributed throughout the United States.

The U.S. is set to accelerate growth both on a near-term basis (the 2021 year) and possibly into the 2022 year. We are impressed that the unemployment rate is now at 6%, which happened quicker than we anticipated. Assuming the new variants of the Covid Virus are susceptible to the various vaccines currently being administered in the U.S. we expect unemployment numbers to continue moving lower – into the 4.5 -5% area by year-end.

Interest rates have begun a relentless move higher and faster than we expected. As a reminder, the benchmark we so often use for interest rates is the U.S. Treasury 10- year bond. At the beginning of 2021, it had a yield of .93%, it now has a yield of 1.71%. While the interest rate is still so very low, that climb in yield is eye-popping. Mortgage rates for 30 -year mortgages that had gotten down to the 2.25% area are now closer to 3.50%.

We now anticipate the yield on the U.S. 10- year Treasury Bond to move up to the 2.25-2.50% range by year-end. That would most likely pull the interest rate on the 30- year mortgage into the 4 – 4.25% range. While, even just a few years back a mortgage rate of 4.0% would have seemed attractive, we believe a mortgage rate of 4.0% now will at the least serve to put a noticeable tapping of the brakes on the housing industry and possible causing an even more extreme reaction.

It seems to us that with unemployment rates moving lower, prices for virtually all services and products moving higher along with energy costs stabilizing with an upward bias to them that the recipe for higher interest rates is in the cards. Adding fiscal stimulus to the list already outlined creates an even greater pressure for interest rates to move higher. Having outlined the reasons for interest rates to move higher, it is important to note that we, Cannon Capital, has been in this position before of calling for interest rates to move higher only to see them flatten out or move lower. So, while we feel confident in our logic, we have been burned on this call more than once and as a result we will not rent an airplane to fly our prediction across the skies.

Finally, our outlook for stocks. There are many factors that can affect the direction stocks move in. However, we are of the opinion that in the current environment in which Central Banks around the world seem to be trying to out do one another in efforts to inject money into the global monetary system that stocks will in general move higher.

The real question is how long can stocks move higher while interest rates or yields also move higher? From our current vantage point, we believe the higher stock prices will persist through the balance of the year – not in a straight -line movement; but, with a positive slope. If indeed interest rates play out as we anticipate, we would expect that there will be some digestion problems for stocks – yet we expect the ever-intoxicating elixir of plentiful money to soothe the nerves and limit the disruptions.

As we noted at the beginning of this article, the current environment has characteristics and nuances that are unfamiliar and could lead to different conclusions than we now expect. As a result of the increased uncertainty, we will move forward with an increase in caution, while reminding ourselves to not jump at the sight of our shadow.

We express our gratitude to work with you and extend our desires that you and your loved ones will enjoy good health and the opportunity to soon move about as you desire.