RISING RATES AND ALTERNATIVE STOCK MARKET HEDGES
GROWTH VS. VALUE
Those of you who read my last two blogs know we have been watching inflation, market valuations, and investor optimism (sentiment). Since the January 22 publication of “Investors’ Euphoria Near Historic Levels,” the popular Invesco Nasdaq 100 ETF (QQQ), arguably the most widely known ETF that tracks the technology-heavy NASDAQ index (growth stocks), dropped by more than ‑8.5% at its lows on March 5. As of this writing, it is still down roughly ‑4.43% from those January levels.
What’s striking is that, during that same time period, the popular State Street SPDR ETF (DIA) that tracks the Dow Jones index (value stocks) was only down ‑3.67% at its lows and is currently around +5% above those same January levels. You can see in the chart below from Bank of America (BofA) that February was actually the worst month for growth versus value stocks since the beginning of the dot-com bubble bursting in March 2001.
Figure 1: February 2021 was the best month for value stocks vs. growth stocks since March 2001.
A stark difference between the early 2000s and now is the interest rate environment. Generally, modern portfolio theory suggests that bonds as a whole are an appropriate hedge for stocks and should perform well when stocks do poorly. While this aphorism largely held true during the dotcom bubble and Great Financial Crisis, it has not been the case so far in 2021. Even with the market volatility, the iShares 20+ Year Treasury Bond ETF (TLT) is down roughly -13.75% for the year. In fact, so far this year has been the third-worst drawdown (interest rates going up) in Treasury bonds since 1973.
Figure 2: This chart from Bank of America’s Global Research ranks 2021 as the third-worst Treasury loss since 1973.
The 10-year U.S. Treasury yield is one of the most widely talked about benchmarks for U.S. government bond performance. In the last six months the yield has gone from below 0.70% to over 1.6%, where it sits today. This move has driven the negative price performance from bond funds like TLT. It has also been a driver, along with market optimism and valuations as we have written about, behind the negative performance of stock indexes like the NASDAQ. Rising rates increases the borrowing cost of companies, among other negative implications. We are monitoring this. According to the Ned Davis Research’s 10-Year Treasury Fair Value model, the fair value (Yield) is 1.58%, which should likely cap any continued movement to the upside, at least for the near term.
Figure 3: Ned Davis Research’s 10-Year Treasury Fair Value model showing fair value is 1.58%.
While bonds have not been an especially useful hedge in 2021 so far, the team at Day Hagan Private Wealth has other useful tools for decreasing volatility in your portfolio without having exposure to risks from rising interest rates. Our Defined Outcome strategy and fee-based fixed indexed annuities may be appropriate tools for diversifying your portfolio while also muting stock market risk. Give us a call if you would like to discuss how these two strategies might be a good fit for your situation.
Sincerely,
Regan Teague, CFA®
Financial Advisor
Day Hagan Private Wealth
—Written 3.12.2021.
Print PDF Copy of the Article: Day Hagan Private Wealth Insights: Rising Rates and Alternative Stock Market Hedges (pdf)
Disclosure: The data and analysis contained herein are provided “as is” and without warranty of any kind, either express or implied. Day Hagan Private Wealth (DHPW), any of its affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Private Wealth literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing.
IInvestment advisory services offered through Donald L. Hagan, LLC, a SEC registered investment advisory firm. Accounts held at Raymond James and Associates, Inc. (member FINRA, SIPC) and Charles Schwab & Co., Inc. (member FINRA, SIPC). Day Hagan Asset Management and Day Hagan Private Wealth are both dbas of Donald L. Hagan, LLC.