The new high list on any given day has been unremarkable of late. So far in 2021, the most S&P 500 stocks making new highs on any given day has been 135 (27% of the index). The average for 2021 is closer to 50. Despite these lackluster daily readings more than half of the stocks in the S&P 500 have made new highs at some point in the past two weeks. Continued expansion in the number of stocks that have been making new highs reflects healthy broad market support.

This week marked the anniversary of Oil busting the theory that there is firm support at $0. Oil is currently trading around $62/bbl, which puts its $100 higher than where it closed on April 20, 2020 (-$38/bbl). Our custom equal-weight commodity index (which is 15% energy and 24% industrials metals, versus 39% & 13%, respectively, in the CRB index) continues to power higher, eclipsing not only its early 2021 peak but the 2012-2014 peaks as well. While Lumber gets a lot of headlines for making new highs - strength in commodities is much broader than that. While this may lead to some concern about rising inflationary pressures, it also says positive things about global growth and the prospects for global equities. You don’t need to be a commodity trader to appreciate & benefit from the current strength in commodities.

There was plenty of positive economic data this week, but the bounce in residential construction activity really caught my eye. This tends to be a leading indicator for the economy overall. Housing starts were particularly strong in March, surging to their highest level since 2006. This probably isn’t too much of a surprise for those who have been watching Lumber build on last year’s gains and move to new all-time highs this week. Not that I was trying to do channel checks during my break last week, but I did notice plenty of trucks on the road headed North and loaded with lumber and logs as I drove through Kentucky, Tennessee, and Alabama (though they are not yet to the point of traveling in convoys surrounded by a security detail).

Many financial assets made new highs in the first quarter. Gold and bonds did not. The drawdown they have experienced since their August highs has been remarkable - eclipsing 20% in the case of bonds, and approaching that level in the case of gold. In the Wall Street Journal’s list of Q1 winners and losers, long-term US bonds came in dead last (with a quarterly decline of 14%). For many conservative investors, this is their safe money and, especially for bonds, thought to be risk-free. The behavioral response to this will be interesting to track and may put further pressure on outdated passive portfolio management approaches.

The rally in the stock market over the past year has been buoyed by many things and its shows. The year-over-year change in the S&P 500 reached its highest level ever this week as the index moved past the anniversary of its COVID lows. One of the sources of support in recent months has been economic data that have been consistently better than expected. Stocks have tended to do well when economic data surprises to the upside and they tend to struggle when the surprises have been to the downside. While the Economic Surprise Index is still positive, it has come under pressure in March. First, expectations for the recovery are being revised higher, but more immediately, there were a number of data misses in recent weeks. For example, housing market activity for February was weaker than expected (we touched on this in this week’s Perspectives piece). Economic optimism is generally welcome and tends to be self-fulfilling, but if expectations move too far ahead of reality, stocks can find themselves on a rocky path.

The recent uptick in US Treasury yields has not been confirmed by other areas of the bond market (specifically Bunds & JGBs). Bonds at this point are extremely oversold and sentiment indicators are pointing to excessive pessimism. The caveat is that bonds are in a bear market and so this sort of behavior should not come as a surprise. Still, there may be some room for yields to consolidate or even pullback from here. If that happens, it could provide a chance for gold to gain some traction. Gold & bonds have moved similarly in recent years, though gold has started to firm up even as bonds sold off this week. What sort of retracement of their recent weakness either bonds or gold can achieve remains to be seen - but an opportunity for that may be emerging.

Treasury yields have resumed their upward ascent and the 10-year T-Note yield appears poised to move toward 2.0%. I saw a study this week from Joe Kalish of NDR that suggested such a move would put further downward pressure on the NASDAQ 100 (to the tune of a 20% peak-to-trough decline). Joe’s analysis tends to be pretty astute, so it’s something to think about even if you don’t come to the same conclusion. Another thing to keep an eye on: if these new highs in Treasury yields are going to be sustained, the yields around the world are likely going to echo the move in the US. Right now, yields in both Germany and Japan are shy of their late-February peaks (0.17% for the JGB and -0.26% for the Bund).

The monthly jobs report always gets a lot of attention. Headlines usually focus on the number of jobs added (or lost) in the month and the unemployment rate. Occasionally, the hourly earnings number will be quoted and even more rarely there will be a mention of average weekly hours worked. While the noise focuses on the payroll number (+379,000 in February), more important news is that this accompanied a contraction in the average weekly hours number. The combination of these is the aggregate weekly hours index, which fell in February to its lowest level since September and remains more than 6% below its peak. If the US economy is on a sustainable road to recovery, this index should start to move meaningfully higher in the months ahead. It’s something I’ll continue to be watching.

There are plenty of ways to take apart and dissect the move in the bond market that accelerated over the past week. From an investment perspective, if the 11% YTD decline in TLT holds, Q1 statements are going to be a jolt for investors who were led to believe that bonds are a portfolio stabilizer and that you can't lose money in Treasuries. From a market perspective, bonds are putting pressure on the Fed. It’s not yet showing up in the CPI, but Fed officials claiming not to see any inflation pressure strain credibility. It's not the rise in yields at the long-end of the curve that will catch the Fed’s eye, but the move higher in the belly of the curve. The short-end remains anchored by Fed actions, but this week saw 3-year, 5-year, and 7-year yields spike. The 5-year yield is approaching resistance at early 2020 levels, while relative to the 2-year yield (which is responsive to Fed policy) the 5-year yield is at its highest level since 2017. For all the talk of central bank omnipotence and bazookas, the bond market > Fed balance sheet. The Fed may need to adjust its approach.

Constructing a narrative can be risky behavior if you end up trusting the story more than the incoming evidence. When you can remain objective, however, it allows you to position for an expected outcome and then test whether that outcome is being realized. Form a hypothesis and test it. Know your parameters beforehand, don’t seek to justify the action after the fact. If the facts change, change your mind. We’ve been discussing the prospects of a global coordinated rebound in growth. The evidence at hand suggests we are indeed seeing that. I see the chart below as the who, what, where, and how of this story. FCX is mining for Copper in EEM using CAT. If any of these start to falter, it will suggest the story is changing. Currently, that is not the case.