FANG is back! – for now. Last year when the economy was in partial lockdown, the slow growth “stay at home” world was all about Tech. With low interest rates and a need for productivity to overcome the Covid cap to an economic recovery, Government stimulus became gasoline for tech stock investors led by FAANG (Facebook, Apple, Amazon, Netflix and Google). Since the vaccines arrived in 2021 there has been a split market for stocks. When the economy appears to be opening up and interest rates are rising thanks to vaccine distribution, then the cyclical stocks shine and tech retreats. When another Covid lockdown in the world hints of slower than expected economic growth along with faling interest rates, then tech zooms back to the vangard of the Bull market, while reopening stocks correct sharply. If one can forecast Covid and yields, then they can be fairly certain which equity sectors will do well. As we can clearly see below, tech is tethered to yields. When the 10 Year rate busted through 1.2% on its way to 1.75% in February and March, the tech sector fell sharply. Since April, when the 10 Year yield fell from 1.7% down below 1.5% today, it became the impetus for tech investors to pile back in. So what is causing yields to rise and fall? Qute simply, stock, bond and commodity markets are glued to the progress and setbacks of battling the global Covid pandemic. The new Covid surge over the past month outside of the US has sent a shiver into Dow type cyclical reopening stocks while the tech sector has surged once again.
The Covid Delta Variant has not only kept most emerging markets in a higher risk box, but there has also been a worrisome rise in cases in the UK, South Korea and Taiwan that has elevated fears among European and US investors of possible future outbreaks and renewed lockdowns. The bad news for non-tech stocks should be short term this summer as very high vaccination rates appear to be limiting outbreaks from translating into a sharp rise in hospitalizations and fatalities as exemplified by the United Kingdom (UK).
While we need Covid immunization to rise sharply to better protect Mexico, Brazil and SE Asia, we think Covid fears and tech stocks will weaken once the UK Covid caseload declines as forecasted later in July. US Cyclical and global Emerging market indices will begin to shine as the UK and others shown here increase their vaccination rates this summer. While we are not presently concerned about a rise in cases in the US or Europe causing a new wave of fatalities, we however warn that sensitve investors will sell heavily should the recent UK experience spread to Europe or the US as the fear of downgraded earnings growth would then spread. The 10 Year yield could be near a major low near 1.4%, but an new first world country Covid variant outbreak does carry short term risk of another month lower into the 1.2’s to 1.3’s yield and delay short term the cyclical and emerging market outperformance of tech due in the 2nd half of 2021.