Crocuses are blooming in my yard, which have always given me joy. In Maryland they would poke their brave little buds up through the snow to promise that days would get longer soon. As faithfully as Fall returns and Winter gets dark and cold and makes me want to eat all of the carbs, these cheerful blooms would remind me that so too would Spring and Summer return with opportunities to go barefoot and eat ice cream without shivering.
Markets are less predictable than the seasons, but no less consistent in their behavior. They go up, they go down. They have tantalizing spikes and heartbreaking plummets. And eventually, they return to measuring the economic valuation of the net present value of future cash flows: what a business is actually worth.
Starting, as ever, with Economics, I went to bls.gov to see if we had new data on GDP to share. Just refinements on previously estimated data, but look at this graph from the GDP page of their website:
Pretty dramatic shift. Doesn’t it look like the third quarter of 2020 replaced what we lost in the second quarter? Alas, not quite. If the end of the first quarter is the starting point, call it 100, then at the end of the second quarter, we were at 90.5. Even recovering as well as we did in the second quarter, we still were behind where we started the year, at 98.2. But a remarkable rebound, nonetheless. I think many of us can relate to this experience. One big setback can make us feel like we have to scramble uphill forever just to get back where we started.
It’s understandable that we’re not all feeling fine yet, even if we’ve kept our jobs, gotten vaccinated, and seen some friends in real life. It’s going to take a bit longer, I’d say. Not just to get back to the top of that hill, but to see that there isn’t another cliff on the other side. Which I very much hope there is not.
There are reasons to be optimistic in this regard. The OECD revised expectations for US growth upwards dramatically after the passage of the latest fiscal stimulus in the Senate. Further, they expect that this growth will support recovery globally.
Similarly, our employment picture is also not back to pre-pandemic condition.
Even after adding 370,000 non-farm jobs in February, we remain at 6.2% unemployment, which only measures people still looking for work who have none. Meaning, it doesn’t include people who gave up, or are under-employed, or had to switch industries, or left the paid workforce to take care of family. Which brings us back to our oft-cited statistics on women in this pandemic. Here’s a graph from the Bureau of Labor Statistics showing what share of people are employed in the United States, in total and split by reported gender:
Women’s participation in the labor force are still down at levels not seen since 1987. This matters, obviously for reasons of equity, but also for overall economic production. If we want to do well at global innovation and competitiveness, we need to empower all our workers to engage in their area of greatest competitive advantage. In my family, for one example, my children’s father is great at distance learning supervision, while I am a fair disaster at it. Like most humans, I can either supervise school or get anything else done. Not both. Their dad has the ability to stay home with them full time, has taken on all the distance learning even on my parenting days, and I am the luckiest ex-wife on the planet. I tried taking on one day a week recently, to save a bit of driving and have lunch time with my kiddos. My sweet partner observed that it was rather a cluster-bomb of chaos (he said it more nicely), and I quickly asked to go back to five days a week of Daddy School. This will enable me to spend my evenings and weekends paying attention to my family rather than catching up on work and trying to unfrazzled myself. Supporting our labor markets in this period of transition and figuring out education and child care for the longer term will allow us to produce more, innovate more, live better, and parent better.
Turning our attention to securities markets, February saw US stocks hit an all-time high, as measured by the S&P 500, and then retreat somewhat, closing the month up nearly 4%. Non-US Developed Market stocks fared similarly, with the MSCI EAFE ending the month up 2% after also touching an all-time high mid-month.
|Reference||What it measures||What it did in February||Where we got the data|
|S&P 500||US large and mid-sized company stocks||Rose 3.95% ||Financial Times (ft.com)|
|MSCI EAFE||Large-cap stocks in Europe, Australasia, and the “Far East”||Rose 2.24% ||Financial Times (ft.com)|
|Barclay’s Aggregate Bond Index||Intermediate-term, investment-grade US bonds||Fell 1.44%||Bloomberg.com|
|US 10-year Treasury Yield||What interest you can earn from a 10-year Treasury note||Rose 0.35%, from 1.06% to 1.42%||Wall Street Journal (wsj.com)|
That seems like a dramatic rise in Treasury yields, and indeed it did increase by a third in just a month. It’s less alarming in historical context, though, when we consider that the ten-year Treasury note yield had never been below 1% before March of 2020, and that was a mere 18 months after being over 3%. It’s more of a bounce than an explosion.
These rising interest rates do have people worried, though, even after looking at longer-term graphs and researching historical movements. For individuals and families, the most salient impacts of higher interest rates are inflation and borrowing costs, particularly mortgages.
Starting with inflation, as we have mentioned before, we are well away from a distressing level of aggregate price increase. First of all, inflation has been too low for some time now. This is a counter-intuitive idea, why would we want more inflation? Without getting into dissertation level detail, some level of inflation is necessary both for full employment and to allow monetary policy some flexibility to react to future economic changes. Further, slightly too high is preferred to slightly too low, as deflation is more damaging to an economy. Ten economists will have at least eleven opinions about what that number should be exactly, but the Federal Reserve is aiming for about two percent. The Fed watches the Personal Consumption Expenditures Price Index, rather than the more often reported Consumer Price Index. The last time the former had a year over year change more than 2% was late 2018. Lastly, there is a lot of “slack” in the economy – workers and plants sitting idle – that could be put back into production to meet increased demand before prices would need to rise in response.
Mortgages have been fantastically cheap for much longer than we might realize, as we watch them climb back over 3% and experience serious Fear Of Missing Out. It might sting less to refinance at 3.1% when the neighbor got 2.9% if we remember that pretty much anything under five percent is crazy cheap, historically speaking.
Rising rates are likely to have a meaningful impact on housing affordability of course, which was already a problem. Those fortunate enough to own a home already might be more concerned about the ability to refinance, or whether rising rates will slow the increase in the value of one’s property. In the short term, meaning the rest of 2021, I think it might be reasonable to expect some ongoing volatility in home prices. In many markets, however housing stock remains historically low, and with the economy hopefully continuing to recover, home values should remain resilient. Individual markets do vary of course.
Nationally, housing prices increased 10.10% in 2020. This brings the annualized increase to 5.39% over ten years. One quick back of the envelope calculation that might be reassuring is that, as long as interest rates are below the increase in value in the home purchased, it’s a positive net investment (not including maintenance costs, etc.). To which I would add, you get to live in it too – something you can’t do with your stocks and bonds. Arguably, one could add the cost of rent for similar housing to that price increase and compare that to interest rates before evaluating whether a house is a good purchase. All that said, a home is both a long-term investment and a very emotional one. We are here to help you navigate this important decision, and many others. We like to help.
 Emphasis – Mine
 I’m much better at producing graphs about economics, however. Hence, competitive advantage.
 This is unnecessary precision, caused by my compulsion for honesty – I couldn’t bear to round to one decimal point and say it went up four percent, when it only almost did…
 Now I’m just trying to play it off by being consistent.
 S&P Core Logic Case-Shiller 20 City Composite Home Price NSA Index, spaglobal.com.