By Mike Willms, Director of Trading and Market Research
Wall Street loves acronyms. Two of the most overused lately have been “FOMO” (“Fear of Missing Out”) and “TINA” (“There is No Alternative”). Recently a combination of the two has led to investors to liquidating fixed income securities and piling into equities at an unprecedented rate.
At one point, the dividend yields on the S&P 500 (1.50%) was almost double that of the yield on the yield on the 10-year Treasury note (0.87%). The discrepancy caused many investors to conclude stocks were the only game on Wall Street (TINA) and contributed to massive inflows into equity as FOMO kicked in.
It appears that the tide may now be turning. In the past couple of weeks interest rates have moved materially higher. As recently as 16 weeks ago, the 10-year US Treasury note was yielding less than 90 basis points or 0.90%. This week, rates on the 10-year US Treasury note rose above the 1.5% plateau.
Rising bond yields have made market participants rethink the wisdom of investing in bonds with little or no dividends trading at very high prices. Equity markets have sold off broadly. TINA, it seems, has hit the road.
Whether and when TINA returns to the Big Board will depend, in large measure, on the direction of interest rates. Markets are now transitioning their inflation forecasts higher based on the Fed’s recently adopted policy of allowing inflation to trend higher than the Fed’s long term target rate of 2.00% before the Fed would implement a policy response. The Fed Chairman has gone so far to proclaim that the Fed is “not even thinking about, thinking about raising rates”.
Be that as it may, a key component of the Fed’s mandate is to promote price stability. As a result, if inflation rises beyond an acceptable level, it may have no choice but to raise rates. Factoring in the ongoing deployment of the various vaccines, the Fed’s current accommodative policies (low rates and $120 billion a month in bond purchases), the fastest reduction in total outstanding credit card debt in history, the highest consumer savings rates on record, and the need for inventory restocking and the economic backdrop looks fairly bright absent a policy mistake in Washington. A stronger economy could put pressure on the Fed to re-examine its lower, longer rate policy sooner than later.
If rates do rise, yield sensitive investors that invest in Treasuries would actually earn a cash return comparable to equities, without the price volatility of the equity market. In that event, TINA’s sabbatical will most likely be extended.