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Why the Dollar Can’t Strengthen: As the pace of the vaccine rollout has sped up, we have seen higher expectations of economic growth in the US and the yield on the 10-year treasury climb from 1.25% a year ago to 1.73% YTD. Typically, you would expect the dollar to strengthen in this environment, since investors can get a higher yield than other parts of the world while still investing in an improving market. Yet the WSJ Dollar index end the week down 10.8% from this time last year. We must ask ourselves if this is due to fear of higher inflation causing the dollar's purchasing power to drop.
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The Tax Worry: As President Biden looks for ways to finance recent and future spending, some investors are planning for an increase in the corporate tax rate. If the President is successful in raising the corporate tax rate from 21% to 28%, it could lead to a pullback in the equity markets. The current S&P500 overall tax rate is 17.54% with the real estate and utility sectors paying the lowest rates at 8.06% and 12.97% respectively. Technology, as the market’s largest sector, would also be impacted as it currently has a tax rate of 14.76%.
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Bad Companies are Good Companies: As a result of the Federal Reserve’s unprecedented actions over the past year and the optimism resulting from the vaccines, investors have been willing to invest in companies with weak fundamentals. Recent data from Goldman Sachs and Bloomberg shows that companies with weak balance sheets have outperformed their stronger counterparts by 20% so far this quarter. Additionally, companies in the Russell 3000 that are losing money are up 25% during the same time period, which is 5x the overall index’s gain.
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Convertibles Are Cool Again: Last year the SPDR Bloomberg Barclays Convertible Securities ETF rose 53%. A large portion of that gain was attributable to Tesla, which is the largest convertible issuer. Now, other companies have increased their participation in the market as well, since convertibles allow them to sell their equity at higher prices and raise capital at a lower interest rate than a traditional bond. This led last year to be the largest year of convertible issuance since 2007…and this year is off to another strong start.
Economic Calendar
Monday: Existing home sales (Feb)
Tuesday: Current account deficit (4Q), New home sales (Feb)
Wednesday: Durable goods orders (Feb), Core goods orders (Feb), Markit manufacturing PMI (Mar), Markit services PMI (Mar)
Thursday: GDP (4Q)
Friday: Personal income (Feb), Consumer spending (Fb), Core inflation (Feb), Trade in goods (Feb), Consumer sentiment final (Mar)
