Several technical factors caused significant volatility in the equity markets last week. In addition to an unwinding of low volatility positions, the equity market struggled with the implication of higher interest rates.
The week ahead will not get easier, as conditions that could push interest rates higher may linger. In addition to the increase in the deficit driven by tax cuts and the federal budget, the administration will release its infrastructure spending program, which is expected to add an additional $1.5 trillion in deficit spending. Given the strong economic statistics and the growing deficit concerns, the market will closely watch this week’s release of inflation data.
My view continues to be defensive on fixed income investments as the combined factors that could push rates higher have become more prevalent over recent weeks. Last week’s weak Treasury auction demand only supports a defensive posture. The rise in longer-term interest rates could accelerate over the next few months. With regards to equities, I expect additional volatility but would be a buyer on dips, as the economic fundamentals and corporate earnings power support prices over the intermediate term.
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