Market participants are getting a steady diet of the rising Treasury yields story, and much of the rationale for the spike implicates increasing inflation expectations.
However, that may not be the only reason, and a deeper examination reveals that if rising inflation proves more muted than some market observers believe, growth stocks and funds, such as the ERShares Entrepreneurs ETF (ENTR), could soon be back in favor.
“Multiple factors can affect interest rates, and inflation may not be the problem. Interest rate increases could be the result of foreigners selling U.S. treasuries,” said ERShares COO and Chief Investment Strategist Eva Ados. “Moreover, with each sale pushing bond prices downward, we might experience the triggering of stop-loss sales, which further exacerbate price drops/yield increases. We should bear in mind that $7T of U.S. debt is held by foreign buyers $1T each held by China and Japan, and China sold bonds the last five months of 2020.”
ENTR tries to reflect the performance of the Entrepreneur 30 Index, which is comprised of 30 U.S. companies with the highest market capitalizations and composite scores based on six criteria referred to as entrepreneurial standards. ENTR primarily invests in US Large Cap companies that meet the thresholds embedded in their proprietary Entrepreneur Factor (EF).
Inflation Not as Hot as Some Think
Amid more chatter about inflation, some investors think the situation is increasingly worrisome, but other data points indicate otherwise.
“Inflation is currently running below 2.4% and should not be the problem going forward. Even if GDP growth is expected to reach 6.5% this year, there are still 9.5M Americans out of work and plenty of distressed industries with companies that may not survive past Q2,” notes Ados.
ENTR also includes sophisticated screens to weed out undesirable companies. The factors screened include management, which requires set factors regarding a company’s management, such as the turnover among the top five executives within a company compared to other companies in the broader universe. A profitability screen requires a company to meet predetermined criteria regarding net income over a static threshold to be included, including the company’s net income as compared to predetermined benchmarks.
“Considering the nature of tech rise, growth could be the new Value. The overreaction to growth a few weeks back could now have shifted to an overreaction to value stocks. Ados believes that entrepreneurial growth companies now offer superior potential upside compared to value stocks,” concludes ERShares.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.