We hope to return soon to activities that were untenable the past year, like going to the movies. While streaming services are great, nothing compares to watching a movie on the big screen, especially a larger-than-life Hollywood blockbuster like Godzilla vs. Kong, which is premiering soon. And as big of a battle as Godzilla vs. Kong will surely prove, it might pale in comparison to the battle that seems to be shaping up between the Market and the Fed. More specifically, bond yields have risen as investors price  in faster growth and higher inflation; that move higher in yields has weighed on risk assets and caused  some to doubt the Fed’s ability to keep interest rates near zero and purchase debt securities in support of the economy.

Last week, as the stock market came under pressure, Federal Reserve Chairman Powell testified to Congress that the Fed could, and would, remain exceptionally accommodative on the monetary policy front. Powell also said the Fed was not concerned about a move higher in yields or inflation, testimony which helped push stocks sharply higher for two days – before the yield on the US 10 Year Note hit 1.55% and the Nasdaq suffered its worst one day sell off since October.

So, what should we long-term investors make of this brewing battle? We think the Fed can and should remain accommodative. The recovery is far from complete, with 10 million fewer jobs today than pre-pandemic. Yields are up, but remain very low on an historical basis, and while inflation expectations have moved higher, inflation today is below the Fed’s 2% target. We remain optimistic on the economy and think stocks are biased higher in 2021. That said, rising yields should be additive to stock market volatility (which we have seen) and pressure traditional fixed income (which we have seen). Thoughtfully diversified portfolios could resonate strongly this year.

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The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital Investments, LLC, a registered investment advisor. 0713-BCI-03/01/2021

Tagged: Tim Holland, weekly wire, market perspectives, the Fed, bond yields, Federal Reserve Chairman Powell, interest rates, inflation