Editor’s note: Any and all references to timeframes longer than one trading day are for purposes of market context only, and not recommendations of any holding timeframe. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don’t have the resources, time or inclination to constantly monitor and manage your positions, leveraged ETFs are not for you.
It may seem like an understatement to say that we are living in strange and unpredictable times, and nowhere is that assessment cannier than in the realm of economics. On a local, national and global scale, the physics that have historically dictated how people, businesses and money behave have been thrown into a state of flux as a result of the pandemic. It’s as though over the past year the whole world was suddenly working under Venusian economic conditions.
In the U.S., the new physics of high consumer demand, high unemployment and high government spending have resulted in, among other things, a growing expectation that inflation will become a renewed concern after years of low to no expansionary pressure on the U.S. dollar. Through the first three months of 2021, treasury yields have climbed sharply to their highest point in more than a year as, inversely, the price of treasury notes has plummeted.
It’s a phenomenon best illustrated by Direxion’s stable of leveraged fixed income ETFs, the Daily 7-10 Year Treasury Bull (TYO) and Bear (TYD) 3X Shares and the Daily 20+ Year Treasury Bull (TMF) and Bear (TMV) 3X Shares, with the inverse funds rising by 20% in the case of the 10-year ETF to nearly 50% for the 20+ ETF through the first quarter.
Treasurys: Rise and Fall of Rates and Prices
Bloomberg. Data represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For standardized and month-end click here.
While this trend certainly indicates a heightened expectation for domestic economic expansion, let’s take a look at why inflation expectations are so high when, just a year ago, many were predicting another massive economic depression. We’ll also take a look at some of the factors that may work against the emerging inflation narrative.
Growth Goes Boom!
One of the clearest signals in favor of the inflation narrative is the fact that the U.S. economy is on pace to post its highest growth rate in years, if not decades. This is so far supported by robust consumer spending and persistently strong revenue and equity performance in the private sector following the sharp dip both experienced in the first half of 2020.
These trends are backed up, both figuratively and literally, by the U.S. Federal Reserve, which recently predicted economic growth of around 6.5% through 2021 while also signaling its strong intention to maintain a near-zero interest rate policy in order to facilitate as much growth as possible.
Of course, this growth hasn’t occurred in a vacuum, and much of the current stability that domestic businesses and consumers are enjoying is the result of government spending in the form of stimulus packages and direct payments. And while the effects of this manner of spending on inflation is unclear, the spending has seemingly helped stabilize the economy through the worst of the pandemic and opened up the potential for demand-driven inflation.
Add to all of this the Biden administration’s recently unveiled $2 trillion infrastructure proposal and it is not hard to see how domestic economic activity could see continued momentum to the point of weakening the dollar.
On the other side of the inflation equation is the cost of commodities and basic goods and services, all of which have staged a fairly pronounced climb in the initial months of 2021.
Everything from oil to lumber to base metals are seeing a price increase as the global economy gradually emerges from its year-long lethargy. This cost increase is further compounded by mounting bottlenecks in the global supply chain, not the least of which include the day-long blockage of the Suez Canal as well as long wait times at America’s busiest West Coast ports.
This price increase is already being felt fairly dramatically in the U.S. housing market, which was already experiencing record-low inventory and skyrocketing prices, a state of affairs exacerbated by the rising cost of basic materials. Manufacturers have also voiced concern over the rapid uptick in supply costs, and it’s not unlikely that prices will remain high as more countries pursue an economic exit strategy from the pandemic and tighten supply lines even more.
Will the Economy Boil Over?
However, while these factors represent a compelling argument for the reemergence of inflation, they are also all symptoms of a temporary phenomenon.
For starters, many Americans have been spending more on goods through the pandemic as a result of unexpectedly robust business activity combined with direct stimulus benefits. This has, in turn, increased the demand for imported goods, particularly from China.
At the same time, record-low interest rates also prompted record low mortgage rates, increasing the value of home buying. And while material costs are rising, in some areas more than others, it’s likely that these supply shortages and bottlenecks will gradually resolve as the pandemic is pushed into submission through the year.
Ultimately, most of the factors posing as inflationary triggers exist on the supply side. The key to whether they persist and ultimately introduce a sustained inflationary trend is if Americans continue to spend money, which they may well do.
Traders hoping to capitalize on any potential inflationary trends should keep an eye on the pocketbooks of the average American, particularly their income following the pandemic. Historically, the single best gauge on whether the economy is set to go into overdrive is rising wages, a trend that has become for most middle-class Americans over the past decade or more.
About as rare as the threat of inflation has been.
Through the first quarter of 2021, there’s only one thing that’s certain. Whether you’re a bull or a bear, Direxion is with you. Our leveraged ETFs are powerful tools built to help you:
- Magnify your short-term perspective with daily 2X and 3X leverage
- Go where there’s opportunity, with bull and bear funds for both sides of the trade; and
- Stay agile – with liquidity to trade through rapidly changing markets
Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged, or daily inverse leveraged, investment results and intend to actively monitor and manage their investment.
Short-term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. Because of ongoing market volatility, fund performance may be subject to substantial short-term changes. For additional information, see the fund’s prospectus.
An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at www.direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.
CUSIP Identifiers have been provided by CUSIP Global Services, managed on behalf of the American Bankers Association by Standard and Poor’s Financial Services, LLC, and are not for use or dissemination in any manner that would serve as a substitute for a CUSIP service. The CUSIP Database, ©2011 American Bankers Association. “CUSIP” is a registered trademark of the American Bankers Association.
Shares of the Direxion Shares are bought and sold at market price (not NAV) and are not individually redeemed from a Fund. Market Price returns are based upon the midpoint of the bid/ask spread at 4:00 pm EST (when NAV is normally calculated) and do not represent the returns you would receive if you traded shares at other times. Brokerage commissions will reduce returns. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Some performance results reflect expense reimbursements or recoupments and fee waivers in effect during certain periods shown. Absent these reimbursements or recoupments and fee waivers, results would have been less favorable.
Direxion Shares Risks - An investment in the ETFs involves risk, including the possible loss of principal. The ETFs are non-diversified and include risks associated with concentration that results from an ETF’s investments in a particular industry or sector which can increase volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. The ETFs do not attempt to, and should not be expected to, provide returns which are a multiple of the return of their respective index for periods other than a single day. For other risks including leverage, correlation, daily compounding, market volatility and risks specific to an industry or sector, please read the prospectus.
Distributor for Direxion Shares: Foreside Fund Services, LLC.