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Volatility is the name of the game in March, and knowing how best to play those dips may be the name of the game in 2021.
After a strong start to the year, the past several weeks have given way to outsize market swings as a rise in rates for benchmark Treasurys makes high-flying, speculative investments that prospered at the onset of the COVID-19 pandemic in the U.S. look awfully pricey.
The 10-year note TMUBMUSD10Y, 1.582% yield briefly rose as high as 1.610% on Monday, surpassing the 1.609% hit when Treasurys sold off sharply on Feb. 25, according to Tradeweb. The yield has climbed for five straight weeks and pushed up from a 0.915% at the start of 2020 to its present lofty level. Bond prices fall as yields rise.
The rise in rates has been blamed for a violent rotation out of high-flying growth stocks into more cyclical, value-oriented names.
Wild swings in the market, indicative of the rotation under way, was on display Monday, with the Dow Jones Industrial Average DJIA, +0.97% surging to nearly 32,000, while the S&P 500 index SPX, -0.54% slipped 0.5% and the tech-heavy Nasdaq Composite COMP, -2.41% traded sharply lower.
Intraday and interday swings have been pronounced as well.
Against that backdrop, Thomas Lee, founder of Fundstrat Global Advisors, offers seven reasons why investors should buy the dips that play out:
1. Washington is moving forward with passing a large fiscal relief package, and Treasury Secretary Janet Yellen has made a forceful case for it.
2. The Federal Reserve has been vocal in its policy stance (last week’s minutes affirmed) and the Fed is patient.
3. U.S. economy is reopening and economic momentum is strong — so strong, JPMorgan’s Chief Economist, Bruce Kasman, says the U.S. V-shape recovery will soon surpass China. Wow.
4. There remains a substantial perception gap between policy makers/media and COVID-19 realized data, and a closing of this gap is positive for risk assets.
5. Millennials are steadily allocating assets toward equities, and the surge in retail brokerage account openings is evidence of this.
6. Bonds are becoming less attractive total return vehicles as inflationary expectation are increasing, boosting the attractiveness of equities.
7. The Cboe Volatility Index VIX, +3.28%, or VIX, should ultimately steadily decline in 2021, and as we pointed out in our 2021 Outlook, periods of declining volatility historically led to big equity gains, particularly for cyclicals.
