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T2 Asset Management

March 2021 Market Commentary

We hope everyone is enjoying a bit of the nicer weather. It is great to see, even as our Chicago yards have turned into mud pits as two feet of snow melts away. The markets have become extremely volatile with 3% drops being matched by new highs just 12 hours later. We certainly need a score card to keep up and the big question on our minds is have we reached the end of TINA? For the uninitiated, TINA stands for “There is No Alternative.” Really since the end of the financial crisis, interest rates have hovered near zero. This has led to an investor belief that there is no alternative to stocks as bonds pay you nothing. So, investors have stuck with stocks and bought the dips no matter how expensive the market may be.

We had a bit of a scare this past week as the market pulled back about 6% from its recent highs. The culprit? The 10-year U.S. Treasury Bonds. As you can see in the chart below, they have nearly tripled in the last 6 months. Inflation measures have been creeping up due to the unprecedented printing of money that is being pumped into the economy. Inflation in turn is kryptonite to bond prices. Put it all together and suddenly bonds aren’t the useless alternative they have been for quite a while.

The economy itself seems to be on relatively solid ground as improvements are made from the COVID recession. For the month Gross Domestic Product (GDP) came in at 4.1%, a bit lower than the 4.2% expected. Non-farm payrolls added 379,000 versus the 182,000 expected. And finally, retail sales were up 5.3%, blowing out expectations of 1.1%. All in all, these are good numbers. We are still down millions of jobs from the start of 2020, but we are headed in the right direction.

Overall, the stock market remains extremely expensive relative to the earnings it creates. That may be ignored when there is no alternative to invest in. In addition, it has long been recognized that the markets can and will go to extremes that don’t seem to make sense at the time. However, in the long run, things tend to revert to normal, and everyone seems amazed that they didn’t see it coming. As we have said many times this year, don’t run screaming from these markets, but buyer beware.