The S&P 500 was essentially flat on the week. It closed at 3,906.71 last Friday and this afternoon it ended the week at 3,811.15. This decline of about 2.5% was very unevenly distributed though. As my colleague Tom Lee pointed out in his note this morning Epicenter sectors all gained despite the high-flying Growth stocks weighing down the major averages. All eyes were on Washington early in the week as Federal Reserve Chairman Jay Powell made bi-cameral appearances to address monetary policy. As we predicted last week, he stuck to the script, was very dovish and did his best to assuage markets, although they may not have been fully convinced from the looks of it.

We’ll give you the scoop below in our Fed Watch note and try to explain to you why Jay Powell can so confidently get up in front of Congress and tell them he’s not afraid of inflation even when debt markets seemed to be doubting him.

Tech Suffers, Bond Market Highly Volatile, Energy Gains

You see the correlations that previously justified preliminary action to prevent inflation from overheating have long-since broken down. The breakdown of the correlations that long underpinned monetary policy have occurred throughout multiple business cycles, rate environments and political administrations. The return on 30-YR US Treasury Bonds minus inflation has declined over the decades. It averaged 5.9% in the 1980s and fell all the way to 1.6% in the 2010s.

Some think the aging of the workforce in developed economies could be the culprit of the

declining natural rate of interest. As Baby Boomers increased their savings as they approached retirement their savings rose, which all else being equal will push rates down.

Some economists cite inequality, others cite the slowing growth rate of productivity or the internationalization of labor markets. Whatever the culprit, or combination thereof, one thing is clearly the result of this undeniable secular trend is that it has facilitated a very welcome ‘free lunch’ of sorts in terms of borrowing.

Since rates have been nearly as low as they can go, and economic growth is expected to pick up substantially, the current levels of debt do not appear unsustainable because they are highly unlikely to crowd out private sector spending as long as the rate of economic growth is high enough. That’s why we can be on the verge of passing a $1.9 Trillion stimulus package and the 10-YR only spikes to 1.6%. You see what we did there? Glass half empty to glass half full.

We have a lot to be grateful for. We passed a somber milestone this week; over half a million Americans have now perished because of COVID-19. The only other mass-casualty event in US history that now exceeds the human toll from this monstrous scourge is the American Civil War and it took four painful years to reap such numbers. Compared to that defining event the economic and social interruption has been mild; certainly much more mild than the doomsayers were predicting back in February and March.

Tech Suffers, Bond Market Highly Volatile, Energy Gains

The reality of our situation is this; we are bruised, we are battered, and we have suffered a global depression that was utterly unimaginable only 12 months ago. Many companies failed and bankruptcies have certainly occurred in large numbers for smaller businesses. However, many publicly traded companies have proved their meddle in a way never seen in the modern age. JP Morgan Economist Bruce Kasman now estimates that the economic recovery in the United States will now likely supersede the one that has recently occurred in China. Imagine that, higher growth rates over here than over there. We’re truly entering a situation that most people alive have never witnessed.

We have been advocating Energy as one of our favorite sectors for 2021. So far, our call has been dead-on and we want to show you some of our analysis that supports why we are still likely in early stages of a secular bull market for the Energy sector and a mean-reversion to more a historically appropriate weighting in the S&P 500.

As my colleague will discuss below, it seems that institutions are still vastly underweight energy despite its outstanding performance on a weekly and YTD basis. That means there’s all the more alpha for those willing to jump into the ring. Remember, on the institutional side, if you come back to your investors with sub-par returns compared to your competitors, then you very well may not have any investors left soon. So, the pile-up that will occur into energy as the great chase—of returns that is—will likely result in some very significant upside for those who got into the trade early.

We released an article on Six Flags, which just reported earnings and seems well-positioned for the re-opening. I, for one, think a lot more people could use some rollercoasters, funnel cake and fun than ever before. Our Lead Digital Asset Strategist, Dave Grider also released a report on IOTA 2.0, an alternative Distributed Ledger Technology platform. Be sure to check both articles out!

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