Good Evening The market decided Thursday that more stimulus is a good thing, even if it inevitably leads to higher rates. Stocks jumped into the open and the growth theme retook leadership from the reflation trade. If all goes well tomorrow, the market will break its losing streak and close higher on the week in a clear conviction signal.

Let's Talk Money!

MARKETS

	NASDAQ	13,398	+ 2.52%
	S&P	3,939	+ 1.04%
	DOW	32,485	+ 0.58%

• Markets:  President Biden signed the $1.9 trillion stimulus bill into law a day early with checks expected to start going out as soon as next week. Finalization of the proposal sent both the S&P 500 and the Dow to record highs on hopes for a rebound in consumer spending. Investors shrugged off a half-percent increase in interest rates which ended well below Monday's high.

BEST AND WORST SECTORS

• Sectors: Seven of the 11 stock sectors closed higher Thursday with growth and momentum sectors taking leadership back from the reflation trade. Winners of late including Energy, Financials, Materials and Industrials all underperformed. It's interesting that Utilities and Consumer Staples both also fell in light of the moderation in interest rates. The two sectors have fallen 1.5% and 2.5% this year as higher rates pull investors out of yielding stocks but got no reprieve today when rates held steady.
• Sector Trends: I wouldn't call the reflation trade dead on one week's worth of trading but it has slowed. The market seems to have come to a consensus that interest rates will increase but it's only the speed at which they rise that will cause problems. This means, if rates don't jump higher suddenly as they did last week, then tech and growth stocks may be able to continue higher.

TOP STOCKS

• Freeport McMoRan jumped on a 2.78% rise in the price of copper and hopes stimulus spending will flow through to economic growth. The mining giant is so large that it accounts for nearly 6% of the S&P Materials sector and 0.49% of the day's 0.54% gain.
• Enphase Energy continued to lead the recovery in solar stocks. The $22 billion residential solar panel provider is now up 25% from Monday's low but still 22% from January's peak.
• Etsy is one of the few tech growth stocks to still maintain its positive returns for the year, now up 28% from the beginning of 2021 and up 400% over the last year. Revenue this year is expected to grow 25% to $2.17 billion and produce earnings of $2.99 per share, an increase of 11% from the year before.

Interest Rates

Could Foreign Buyers Help Keep U.S. Rates Lower?

Interest rates are the biggest story in the market right now...ok, the ONLY story. So anything that helps us forecast whether rates will continue to increase, sending tech stocks lower, or will moderate as they have over the last few days is something you want to watch.

When the government needs money, which is pretty much all the time, it holds a Treasury auction selling bonds and collecting cash from investors. The amount of investor demand helps to set interest rates and gives the market a clue into where rates may head in the future.

Wednesday’s auction of $38 billion in 10-year bonds was well received with 20% of the total demand from foreign buyers, helping to send the rate down to 1.5% and calm the market. Remember, it was the record low demand for last month’s 7-year auction that spiked rates across the board, shooting the 10-year yield towards 1.6% and sending stocks lower.

Foreign demand will be extremely important in future auctions this year to keeping rates down even against strong economic growth. Eurozone investors are paying 0.3% to hold 10-year bonds...yes the interest rate on the bonds is actually negative, and it’s negative 0.1% in Japan, so the 1.5% yield on U.S. ten-year bonds looks really good.

It will also be important because U.S. investors have been net sellers of Treasury debt, selling some of the $24 billion in bonds bought during the first half of 2020 in the face of pandemic uncertainty. Inflows to U.S. government bond funds spiked from $82 billion a day to over $112 billion by U.S. investors during the first half but have come down to about $92 billion a day.

Treasuries will need the increased demand from foreign buyers to keep rates low in the face of 6% economic growth and inflation that could top 2.5% by June. While rates have fallen a little over the past few days, it could just be a matter of time before one weak auction spikes them again and sends stocks lower.

Gold

Gold Doesn’t Glitter Quite as Bright

Money manager BlackRock is out with research this morning explaining the breakdown in gold as a hedge against weakness in stocks. In the past, investors have flocked to gold anytime stock prices fall and uncertainty rises, which made the metal a good asset to hold for market insurance.

The price of bullion is down 16% from its August peak and just over 11% lower this year, pressured by the rise in interest rates. The problem lately is the reason stocks are falling is also bad for gold.

During other stock crashes, financial instability or falling dot-com stocks meant greater uncertainty but less effect on interest rates. If nothing else, rates often fell when the market weakened. This time around, the market is weakening because rates are rising.

Since holding gold pays no returns until sold, it competes with other safety investments that pay a yield like bonds. Think of interest rates as an opportunity cost to investing in gold. You could use that money to get a consistent yield or invest in gold for the potential yield later on. As interest rates increase, that increases this cost of holding gold and drives the price lower.

Gold may still regain some of its shine if inflation heats up later in the year. Higher inflation will push interest rates up as well but is still a net positive for gold as investors rush to the store of value in precious metals.