Long-term interest rates have meaningfully moved higher over the last couple of weeks. Following a bounce off the lows in March along nearly every asset, rates had remained range-bound while stock prices were making new highs.
Long-term interest rates have meaningfully moved higher over the last couple of weeks. Following a bounce off the lows in March along nearly every asset, rates had remained range-bound while stock prices were making new highs.
The major reason for rates moving higher is that expectations of economic growth are rising. Multiple parts of the economy are in expansion modes like tech, housing, construction, and consumer spending. Depressed parts of the economy like services, restaurants, casinos, and retail have struggled but should see a massive rebound.
The major reason for rates moving higher is that expectations of economic growth are rising. Multiple parts of the economy are in expansion modes like tech, housing, construction, and consumer spending. Depressed parts of the economy like services, restaurants, casinos, and retail have struggled but should see a massive rebound.
Another important component is global growth.
Another important component is global growth.
Global Growth Upturn
Global Growth Upturn
Prior to the coronavirus, global growth was decelerating. This was evident through the 10-year Treasury yield dropping from 3.5% in October 2018 to under 0.5% in March 2020. Another important component of global growth has been manufacturing.
Prior to the coronavirus, global growth was decelerating. This was evident through the 10-year Treasury yield dropping from 3.5% in October 2018 to under 0.5% in March 2020. Another important component of global growth has been manufacturing.
This has been in a downturn due to slowing growth and the trade war. However, there are some reasons to believe that we are at the beginning of a manufacturing upturn, and it could be longer and bigger than a typical cycle. Inventories are quite low, while new orders are increasing. This inventory restocking cycle could be a powerful tailwind to manufacturing. Another contributor is likely to be the record-high amounts of fiscal stimulus that will be deployed all around the world. This should also be supportive of manufacturing activity.
This has been in a downturn due to slowing growth and the trade war. However, there are some reasons to believe that we are at the beginning of a manufacturing upturn, and it could be longer and bigger than a typical cycle. Inventories are quite low, while new orders are increasing. This inventory restocking cycle could be a powerful tailwind to manufacturing. Another contributor is likely to be the record-high amounts of fiscal stimulus that will be deployed all around the world. This should also be supportive of manufacturing activity.
Industrial and Material Stocks
Industrial and Material Stocks
As a result of this bullish dynamic, industrial and material stocks have been quite strong. US Steel
As a result of this bullish dynamic, industrial and material stocks have been quite strong. US Steel
Strength in these sectors is supportive of expectations that long-term interest rates will continue trending higher, while global growth surprises to the upside. Many of these sectors have been weak for a long period of time leading to lower levels of capex. This could result in capacity squeezes if fiscal stimulus is successful in increasing demand and economic activity.
Strength in these sectors is supportive of expectations that long-term interest rates will continue trending higher, while global growth surprises to the upside. Many of these sectors have been weak for a long period of time leading to lower levels of capex. This could result in capacity squeezes if fiscal stimulus is successful in increasing demand and economic activity.
This could spark the first, real bull market in industrial and material stocks since 2003-2008. During this period, global growth surprised to the upside, and material stocks outperformed in addition to value stocks and energy stocks. In contrast, many growth stocks underperformed with the frothiest companies of the dotcom bubble enduring the heaviest losses.
This could spark the first, real bull market in industrial and material stocks since 2003-2008. During this period, global growth surprised to the upside, and material stocks outperformed in addition to value stocks and energy stocks. In contrast, many growth stocks underperformed with the frothiest companies of the dotcom bubble enduring the heaviest losses.
