Money Velocity and March Markets

Key Points – Money Velocity and March Markets:

March market performance
Year to date market performance
Money velocity
Fear of inflation
5 minute read | 8 minutes to watch

They say that March comes in like a lion and goes out like a lamb. Well, this month has been a wild ride in the stock market and the bond market. Lots to share with you this month. I’m Dean Barber, founder, and CEO of Modern Wealth Management. Stick around for great information on what’s happening in the economy and the markets.

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Money Velocity and March Markets

March 2021 Markets

March was a crazy month. Let’s take a quick look at what the major indexes did in March, and then we’ll take a step back and see where these major indexes are year to date.

March 2021 Stock Market Performace

Money Velocity - March 2021 Market Performance

Figure 1 | Source: Chaikin Analytics

Let’s start with a monthly look in Figure 1. We can see that the Dow Jones Industrial Average was our winner for March, up 7.18%. And that was followed by the equal weight RSP at 5.39%, and the S&P 500 higher by 4% in March.

We go down to the bottom here, and the Russell 2000, the IWM, is negative for March by 1.79%. So everything started pretty decently in March, and then we had a little bit of a pullback.

We will discuss why that pullback occurred, the 10-year Treasury, bonds, and money velocity.

Stock Market Performance Year to Date

Figure 2 | Source: Chaikin Analytics

So let’s look on a year-to-date basis at the major indices in Figure 2. And what we see is that the worst performer for March is still by far the best performer year to date. Small caps, the S&P 500, small cap sector up almost 16%, year to date, mid cap 400 is up 11.86%. And then the Russell 2,000, up 9.35%.

It’s interesting to look at the Dow Jones Industrial Average up 8.46% year to date, and it was up almost a little over 7% just for March. So most of the gains in the Dow came in March.

The S&P 500 is positive by 5.86%. And remember, S&P 500 was up a little over 4% in March alone.

Is the Shift Back to Large Cap Starting?

So, are we starting to see a little bit of a shift away from small cap and back to large cap again? I don’t think it’s happening yet. This is a pretty short timeframe to judge that by we are watching that very, very closely. As needed, we can overweight or underweight into the sectors that we need to be in to make sure that we’re catching what’s going on.

What’s Up with Bonds?

Figure 3 | Source: Kwanti

I want to turn our attention to bond funds in Figure 3. As of the recording of this, we have the 10-year Treasury yield at 1.77%. Remember, the 10-year Treasury yield started at 1%. Interestingly, that’s happening because the Federal Reserve has said that they plan to keep interest rates low, with no changes through 2022.

But this rise in the 10-year Treasury has killed the TLT. Now the TLT is an ETF that mirrors the 20 year Treasury. It’s the bottom line in Figure 3. It’s down 13.89% year to date. AGG is the bond aggregate, it’s the middle line, and it’s down 3.47% year today. So those are in stark contrast to what’s happening in the equity markets.

This rising interest rate environment and how much we’ve seen it rise so much in the last month have been part of the Cause for the volatility we’ve seen in the stock market.

This top line in Figure 3, the positive 2.27% year to date, is a fund that invests in mortgage-backed securities and senior secured debt. So the mortgage-backed security, ETFs, and mutual funds. They’re not all created equal. So they haven’t all done the same things.

But that’s an area that the rising interest rate environment shouldn’t affect nearly as much as the AGG or the TLT. So when we’re looking at bonds within your portfolio, obviously, we still think GG has a place in there. I believe the TLT is way too risky right now.

What About Inflation?

But I also think that we need to consider adding some floating rate and some mortgage-backed security. So what’s going on with interest rates? Why are they rising? Is inflation coming?

Let’s look at inflation from a little bit different perspective. When we understand how inflation is measured and what causes inflation, you have heard me discuss it before. We’re going to look at money velocity.

Money Velocity

Figure 4 | INTERACTIVE – Source: St. Louis Fed

So money velocity is simply defined as how many times per year $1 changes hands.

Figure 4 shows us money velocity all the way back to 1959. So you can see here in Q1 of 1959, $1 was changing hands on average 1.773 times per year. That stayed fairly benign through the 60s.

Then, in the 70s, velocity started picking up. Into the 80s, velocity picked up and peaked out in Q3 of 1997, where the dollar was changing hands on average of 2.192 times per year, then we go to a declining money velocity, pre-COVID.

Back here, in Q4 2018, money was changing hands at 1.463 times per year COVID hits, and money velocity drops through the floor. And we now have money velocity, which means money is changing hands at an average of 1.148 times per year.

Fear of Inflation

So this fear of inflation is coming roaring back because of all of the stimulus money. It can’t happen until money velocity picks up. So the risk is if money velocity picks up and we even get back to where we were pre COVID. That could cause some inflation.

But let me reiterate that the Federal Reserve has said that they don’t see inflation being a risk in the short term, which is the next couple of years. They have committed to this zero interest rate policy through 2022.

Uncertainty Still Looms

Time will tell. And there’s a lot of people that are saying a spike in the 10-year Treasury is going to be short-lived, that it’ll come back that they don’t think that the economy is going to be as strong as what they believe it is, we still don’t know what’s going to happen with COVID.

There are rising cases out there again, and so a lot is unknown. And I think that what that means is we’re going to continue to see volatility here for the next couple of months in the stock market. We’re going to continue to see volatility and some pressure in the bond market.

Keep Communication Open

I want you to keep in mind that your portfolio should be designed to allow you to achieve your short, intermediate, and long-term financial goals.

I always encourage you to stay in touch with your advisors here at Barbara Financial Group. Keep those lines of communication going.

Ask us the questions, review your plans with us and stay in touch to make sure that we can help you live your one best financial life. Thanks for taking the time to join me for this monthly economic update. I’m Dean Barber, founder, and CEO of Modern Wealth Management.

Thanks for joining me for the monthly economic update.

Dean Barber Founder & CEO

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