Rotation is the issue that accompanied investors in February. Overall sentiment in financial markets remained positive, but return dispersion between markets and sectors was relatively high. Accompanied by rising interest rates, cyclical "value" assets posted strong gains, while the otherwise popular investor darlings from the technology sector underperformed at the end of the month due to skyrocketing interest rates. U.S. President Joe Biden, meanwhile, appears to have a realistic chance of getting his proposed $1.9 trillion stimulus package passed thanks to a congressional majority - despite Republican opposition. The weather disaster in Texas appears to be adding significantly to the pressure for such large government programs. On the one hand, because many private households have become distressed due to high electricity bills, and on the other hand, the cold crisis once again exposed the disastrous condition of the infrastructure in the USA. The cold spell pushed the entire power grid to the limit and left many households in the dark with temperatures as low as -18 degrees Celsius.
Earnings reports from the big tech giants Amazon.com or Alphabet were impressive, but much of this seems to have already been priced in, and rising interest rates were a headwind for the richly priced stocks, so that despite strong numbers, the share price fantasy was limited for most of the big tech stocks. In general, Q4 earnings surprised positively compared to expectations, especially for the Japanese companies of the Nikkei225 index. Here, earnings expectations were exceeded by 55% on average. The Swiss SMI closed the month -0.65% lower. The US technology stock markets was slightly lower with -0.12%. Country indices with higher cyclical exposure such as Japan or Europe posted more significant gains. The speculative excesses, which could already be observed in small-capitalization stocks in January, experienced a revival at the end of the month. GameStop stock, which collapsed from its January peak of $483 to around $38, rebounded to over $170 in the final trading days of February. We view those excessive outbursts as symptoms of an aging bull market (see FOCUS) and warning signs for the full year, which we are likely to approach very tactically.
The US yield curve has risen further to its 2014 level. The yield differential between 5-year and 10-year US government bonds is now around 75 basis points. The yield curve reflects the expectation of future economic growth after the lockdown, which is expected to be fulminant in the first quarters due to the multitude of government measures and stimulated consumption. 10-year U.S. Treasury bonds shot up to 1.6% for a brief moment, the highest level since the Corona crisis hit last year. Thus, the Federal Reserve is being challenged early this year with these market conditions. Jerome Powell and other Fed leaders have already tried to verbally reassure the markets that monetary policy will remain very loose until the labor market and inflation have recovered substantially.
The Swiss franc was for once conspicuously weak against the EURO. EUR/CHF almost reached the quotation of 1.11 francs at times thanks to the growth optimism. The price of copper continued to rise and reached the next "magic" mark of over $9000 per ton. The price of gold suffered from rising interest rates and was the lone loser among commodities. WTI Oil gained 18% to close the month at $61.50 per barrel, after commodity traders were willing to trade negative prices of up to $-40/barrel to avoid delivery a little less than a year ago.
Investor sentiment remains good, but has dampened somewhat as measured by survey data. Speculative excesses, which are taking place on the sidelines, are still a warning sign of a general euphoria (see FOCUS). It is important to keep an eye on these developments. More important at the moment, however, are developments in long-term interest rates. The past two weeks have shown us that from an interest rate level of 1.6% for 10-year U.S. Treasuries and forward price/earnings ratios of over 22 on the U.S. equity market, investor nervousness increases. Investors still have the full support of the Federal Reserve behind them and this nervousness is therefore likely to be of a temporary nature once again, especially because the sell-off on the bond markets currently appears excessive. We therefore recommend maintaining an overweight equity allocation and opportunistically buying put options when volatility is low in order to be prepared for unexpected sell-offs.