Why The Yield Spike May Be Done And Value Is A ‘Hail Mary’ Trade

Why The Yield Spike May Be Done And Value Is A ‘Hail Mary’ Trade

The spike higher in bond yields this week shook markets around the world and became the dominant talking point in pretty much every asset class.

Amanda Agati, chief investment strategist for PNC Financial Services Group, joined the “What Goes Up” podcast to discuss what it all means, plus why the rotation to value stocks may be a “Hail Mary” trade and how she is advising clients to allocate portfolios as the economy slowly recovers from the pandemic.

Below are are some lightly edited highlights of the conversation. And click here to listen to the entire podcast.

On the jump in rates:

“At the end of the day, this feels like about as high as we can see the 10-year go from a market-driven perspective... So the 10-year is absolutely at the highest level of the pandemic, really outsized moves. And yet we really haven’t had a lot of meaningful news. So fairly extreme moves here on basically this idea that we’re going to get a ton of stimulus coming into the system and fast.”

“So I think this is the bond market’s interpretation that Congress is going to effectively pull off a $1.9 trillion stimulus package and then turn right around and do another package -- infrastructure-focused and of the same magnitude or larger -- just in a matter of a few months. And our take on this is that the bond market is obviously concerned about it, obviously fixated on it, but ultimately it’s going to be very difficult to get all of this done in rapid succession. I think it’s pretty clear and well-understood that the $1.9 trillion relief package can get done through budget reconciliation, but not at all clear that we can get the same magnitude of stimulus done for infrastructure without raising taxes.”

“And so I think that’s going to be the key to the path forward in terms of the intermediate and longer end of the curve. I think things are going to settle down a bit. We may not actually see rates fall back down meaningfully, but this rate of change has to slow down.”

On the economy’s recovery:

“It’s pretty clear that we are not out of the woods yet in terms of the pandemic. Case curves are definitely moving in the right direction. There is some progress on the vaccine front. But my goodness, things are moving a lot slower than I think all of us would like to see at this point. And so that really does pose some pretty significant challenges as it relates to the reopening and the path forward. Somewhere in the neighborhood of 80% of U.S. GDP is still in states that are under some form of economic restriction or lockdown. So we’ve got a long, strange trip ahead of us, right? 2020 was a very long, strange trip and 2021 is setting the stage for a similarly long and strange trip to get to a reopening.”

On the rotation from growth to value stocks:

“It really largely has been a sentiment shift. It has not been an underlying fundamental improvement and fundamental acceleration. And so we’re really of the mindset that this is really getting pretty extended here in terms of this value rally in the short run and this go-outside trade.”

“The stay-at-home trade has really distinguished itself and continues to, even as a function of Q4 earnings season. It’s still on that stay-at-home trade side. And so even though valuations are pushing pretty elevated levels, we actually think the underlying fundamentals in many aspects of the stay-at-home trade, the growth areas in particular, justify valuations. And so on a growth-adjusted basis, we actually think there’s still room left. Still much more of a ‘Hail Mary,’ I think, in terms of this value rally that we’ve seen. The market is starting to price for perfection on the value side of the equation when we know that we’re nowhere near back to pre-Covid, pre-2020 norms. And so pricing for perfection in a backdrop that’s anything but that gives us a little bit of pause here at the stage of the market rally.”

On allocations:

“So the brightest star in the equity asset class universe, as far as we’re concerned, is emerging markets. We think from an investment-thesis standpoint, it’s just a really strong backdrop setting the stage here in 2021 and beyond potentially -- at the very earliest stages of a major regime shift. The baton tends to be handed off between the developed world and the emerging world every 10 years or so. And we think this could very well be the start of that.”

“When you look at the data, as it relates to the pandemic, they’ve done a better job managing through that up to this point. And it has enabled them to get their economies more reopened. It isn’t that they are fully reopened, but they are certainly ahead of the developed world. And so that has had really positive implications for the trajectory of earnings growth across much of the emerging markets world. And so it’s the highest earnings growth projection across equities for 2021 and beyond.”

“Other areas in equities that we do like very much, I’ll throw it out there, it’s a very controversial trade call, the QQQ (Nasdaq 100 ETF). Very much in keeping with that, stay-at-home trade.”

The entire podcast can be found at this link:

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