Notes on the Week Ahead

The pandemic has had an unfortunate impact on my piano practice.  In truth, I have never been a promising student - my musical efforts have always rather resembled roadwork on an overused urban highway - that is to say, not so much an exercise in inventive construction as one in increasingly inadequate repair.  Still, for some years, my piano teacher would relieve the general ear strain by suggesting some new tune for me to work on.

As a hungry child, growing up in a large family, some forays into cooking were essential.  My early rice-making experiments, however, were exercises in frustration.  I would start with a large sloshing pot of icy water and, having transported it to the stove with wobbly hands, I’d dump in a bag of rice and wait for results. It seemed to take ages for the water to heat up, as I peered down hopefully at the submerged pile of grain. Eventually, things would begin to bubble and steam, but long before the rice came close to “al dente”, the water had boiled down, exposing an island of uncooked rice, with an acrid burning smell emanating from the bottom of the pot.

The week ahead will be a busy one for market-moving events and economic data.  However, beyond the noise, investors will continue to mull two crucial questions: First, how far could interest rates rise and, second, what could that mean for equities?

Long-term interest rates have risen sharply in 2021 so far, with the yield on the 10-year Treasury bond climbing from 0.93% on January 4th to 1.34% by last Friday.  This move is a logical reaction to better news on the pandemic, encouraging data on how the economy has weathered an early-winter surge in covid cases, and rising prospects for significant fiscal stimulus.  However, given this positive news flow, the bond market may have under-reacted so far, suggesting that investors need to be positioned for further increases in rates as economic springtime turns to summer.

In a year when everything has been different, it was comforting to watch an almost normal Super Bowl with Tom Brady, albeit wearing the wrong uniform, winning yet again.  It wasn’t that close a game – Tampa Bay established a lead in the first half and just did what they needed to do to hold that lead to the end. 

This Friday, February 12th, marks the start of the Chinese New Year and the Chinese people, like the rest of humanity, will say a hearty good riddance to the last year with hopes for easier times ahead.  The Year of the Ox should be better, with vaccines gradually allowing for a return to normal life and China should be able to build on its early economic recovery and resume its very long trend of strong economic growth.

In two weeks, in Daytona Beach, Florida, 40 cars will compete for the most coveted prize in NASCAR.  As the cars slowly circle the track in the pace laps before the green flag drops, the noise of engines revving will give notice to all of the speed to come.  In a similar fashion, while the U.S. economy has slowed to a crawl over the winter, there are growing reasons to expect a sharp acceleration in the months ahead.    

In most decades, there are dramatic events that interrupt the course of history and the last twenty years have seen at least three obvious examples of this.  However, more often than not, it is the reaction, in public attitudes and policy, rather than the event itself, that shapes the path taken by society in its aftermath. The horror of 9/11 laid the groundwork for wars in Afghanistan and Iraq.  The global financial crisis led to an era of much tighter oversight of financial institutions that, in turn, curtailed lending, contributing to the slowest economic recovery in modern U.S. history.  

Last Thursday, ahead of the inauguration, President-elect Biden outlined proposals which, if implemented, could have profound social and economic effects as well as impacts on the broad direction of fiscal and monetary policy.

At the start of a new week and a new year, investors have plenty to think about.  Despite the rollout of vaccines, the pandemic has worsened in recent weeks, dragging on the global economy.  U.S. stock markets ended at record highs on Friday and both bond and equity valuations look lofty.  And in the week ahead, the Congress will certify the election of Joe Biden as President, although with an unusual degree of political acrimony.