Week of March 29, 2021

Rising interest rates and the concern for rising inflation have hada the U.S. investment markets on edge, making for a volatile environment.  Last Friday, all three major equity indices rallied to their session highs into the close of the day with the Dow closing up 450 points.  The S&P 500 climbed 1.7% to reach another record high.  The NASDAQ recovered from a 0.8% loss early on Friday to finish the gaining 1.2%.

Month-to-date through last Friday, the Dow and S&P 500 have gained 6.9% and 4.3%, respectively.  The tech-heavy NASDAQ has declined 0.4% on the month as some investors have exited technology stocks amid rising Treasury yields.

Traders are bracing for increased volatility during this holiday-shortened week with possible quarter-end rebalancing among pension funds and other major investors.  The stock market is closed for the Good Friday holiday, but the March jobs report is still on schedule for release that morning.  Economists expect 630,000 jobs to have been created (or rehired) in March, and the unemployment rate to fall from 6.2% to 6%.

The rapid increase in bond yields over the last few weeks could set the stage for money managers to make significant adjustments in their portfolios.  This has been the case for Hastie Financial Group.  Rising bond yields have been a major cause the long-awaited rotation from high-flying technology (considered growth) stocks to financial and industrial (considered value) stocks.  Market analysts have been calling for this rotation for the last few years, and the recent increase in bond yields provided the catalyst for investors to refocus their attention.

Rising bond yields have also put pressure on bond prices in recent weeks.  A commonly used measure of a bond’s sensitivity to changes in interest rates, known as duration and is expressed in number of years.  The longer a bond’s duration, the most sensitive its price will be to increasing (or falling) interest rates.  Money managers have recently looked to shorten the overall duration of the bond portion of their balanced portfolios.