I called Jay Powell's bluff a week ago. Remember when he said last week that we're still far from The Fed's inflation targets?

Well, I was right to doubt him. The market didn't like his change in tone Thursday (Mar. 5).

You see, when bond yields are rising as fast as they have, and Powell is maintaining that Fed policy won't change while admitting that inflation may "return temporarily," how are investors supposed to react? On the surface, this may not sound like a big deal. But there are five things to consider here:

1. It's a significant backtrack from saying that inflation isn't a concern. By admitting that inflation "could" return temporarily, that's giving credence to the fact that it's inevitable.
2. The Fed can't expect to let the GDP scorch without hiking rates. If inflation "temporarily returns," who is to say that rates won't hike sooner than anyone imagines?
3. Fool me once, shame on me, fool me twice...you know the rest. If Powell changed his tune now about inflation, what will he do a few weeks or months from now when it really becomes an issue?
4. Does Jay Powell know what he's doing, and does he have control of the bond market?
5. A reopening economy is a blessing and a curse. It's a blessing for value plays and cyclicals that were crushed during COVID and a curse for high-flying tech names who benefitted from "stay-at-home" and low-interest rates.
6. The Senate will be debating President Biden’s $1.9 trillion stimulus plan. If this passes, as I assume it will, could it actually be worse for the economy than better? Could markets sell-off rather than surge? Once this passes, inflation is all but a formality.

Look, it's not the fact that bond yields are rising that are freaking out investors. Bond yields are still at a historically low level, and the Fed Funds Rate remains 0%. But it's the speed at which they've risen that are terrifying people.

According to Bloomberg, the price of gas and food already appear to be getting a head start on inflation. For January, Consumer Price Index data also found that the cost of food eaten at home rose 3.7 percent from a year ago — more than double the 1.4 percent year-over-year increase in all goods included in the CPI.

The month of January. Can you imagine what this was like for February? Can you imagine what it will be like for March?

I'm not trying to sound the alarm- but be very aware. These are just the early warning signs.

So, where do we go from here? Time will tell. While I still do not foresee a crash like we saw last March and feel that the wheels remain in motion for a healthy 2021, that correction that I've been calling for has already started for the Nasdaq. Other indices could potentially follow.

Finally.

Corrections are healthy and normal market behavior, and we have been long overdue for one. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017).

Most importantly, this correction could be an excellent buying opportunity.

It can be a very tricky time for investors right now. But never, ever, trade with emotion. Buy low, sell high, and be a little bit contrarian. There could be some more short-term pain, yes. But if you sat out last March when others bought, you are probably very disappointed in yourself. Be careful, but be a little bold right now too.

There's always a bull market somewhere, and valuations, while still somewhat frothy, are at much more buyable levels now.

My goal for these updates is to educate you, give you ideas, and help you manage money like I did when I was pressing the buy and sell buttons for $600+ million in assets. I left that career to pursue one to help people who needed help instead of the ultra-high net worth.

With that said, to sum it up:

There is optimism but signs of concern. A further downturn by the end of the month is very possible, but I don't think that a decline above ~20%, leading to a bear market, will happen.

Hopefully, you find my insights enlightening. I welcome your thoughts and questions and wish you the best of luck.

When Will the Russell Be Buyable?

Figure 1- iShares Russell 2000 ETF (IWM)

So why is the Nasdaq buyable right now, and the Russell 2000 isn’t just yet? Hasn’t the Russell (as tracked by iShares Russell 2000 ETF (IWM)) declined 6.65% since February 9th?

It pains me not to recommend a BUY for the small-cap Russell 2000 just yet. I love this index’s outlook for 2021- aggressive stimulus, friendly policies, and a reopening world.

Consumer spending, especially for small-caps, already appears to be very pent-up as well.

I wouldn’t fault you at all if you started initiating positions. But I personally will be waiting for a bit more of a cool down for a better entry point. The RSI isn’t quite oversold yet either, and we’re just about at the 50-day moving average.

As tracked by the iShares Russell 2000 ETF (IWM), small-cap stocks have been on a rampage since November.

Since the market’s close on October 30, the IWM has gained about 40% and more than doubled ETFs’ returns tracking the larger indices.

If you thought that the Nasdaq was red hot and frothy, you have no idea about the Russell 2000.

Not to mention, year-to-date, it’s already up approximately 10.18%. The Nasdaq, in comparison, is now red for the year.

I feel the Russell’s slowdown has been long overdue, but that’s all it is- a slowdown. The Nasdaq’s downturn is probably more buyable than the Russell’s right now, even though I feel the current climate favors the Russell more.

HOLD. If and when there is a deeper pullback, BUY for the long-term recovery.

Where Could the Streaky S&P Go?

Figure 2- S&P 500 Large Cap Index $SPX

The S&P 500 is a complex index to call. It’s incredibly streaky and is between a rock and a hard place right now.

From the end of February until now, the S&P has been trading like a slumping team. Think of the Lakers, who still have Lebron James but have looked ordinary without Anthony Davis. Well, think of bond yields/inflation as an Achilles injury and Tesla (TSLA) as Anthony Davis. It was apparent this was going to eventually happen once the volatile Tesla joined the index.

The large-cap benchmark has now declined for 3 days in a row and 5 of the last 6 sessions. But it’s only 4.2% below its all-time highs and is still up about 0.3% for the year. That’s not quite buyable yet.

For now, it’s best to sit and wait this one out. March has started off with headwinds, but don’t forget. The month also started with the S&P’s best one-day gain since June.

HOLD for now, but be prepared to either BUY or SELL depending on its moves. For an ETF that attempts to directly correlate with the performance of the S&P 500, the S&P 500 SPDR ETF (SPY) is a great option.

The Dow Jones Is Not Yet Buyable

Figure 3- Dow Jones Industrial Average $INDU

The Dow Jones has been behaving more stable than the other indices. However, we’re not quite as buyable.

After seeing a record close last Wednesday (Feb. 24), the Dow plummeted by almost 560 points on Thursday (Feb. 25) and another 469 points on Friday (Feb. 26).

However, despite all that, we’re only about 3% off the record high, and only down about 1.5% since this market volatility began on roughly February 12th.

Where do we go from here?

Like the S&P, the Dow is between a rock and a hard place right now. It’s really not far off its all-time high. While the Nasdaq is in correction territory, the Dow is trading comparatively dull. We’re right at about the 50-day moving average too, and the RSI is also not indicating that the index is oversold.

Yes, there are underlying concerns, and the market is more of a house of cards than anyone realizes. But the Dow is still comparatively stable to the others, and I can appreciate that.

Many analysts believe the index could end the year at 35,000, and the wheels are in motion for a furious rally for the second part of the year. It’s at a decent entry point, but you can do better.

There are some Dow stocks at a decent entry point right now. But as an index, I would like the Dow to see a deeper pullback.

From my end, I’d prefer to HOLD and assess the situation.

My call on the Dow stays a HOLD, but this could change soon.

For an ETF that aims to correlate with the Dow’s performance, the SPDR Dow Jones ETF (DIA) is a reliable option.

Beware of Inflation

As I said in the intro, Bloomberg claims that food prices are soaring faster than inflation and incomes, and January, Consumer Price Index data also found that the cost of food eaten at home rose 3.7 percent from a year ago — more than double the 1.4 percent year-over-year increase in the prices of all goods included in the CPI.

I have been calling out Jay Powell for being cavalier in his inflation thoughts and did not buy what he was selling last week. Yeah, inflation hasn’t reached his magic 2% target yet, but he essentially admitted Thursday (Mar. 4) what we all knew. The signs are there, have been there, and will be there. “Temporary inflation”? We weren’t born yesterday.

How long will the Fed do this song and dance? There’s officially an air of “if not if, but when” concerning inflation.

Pent-up consumer demand is great. Retail sales crushing expectations reflect this. However, bond yields rising as fast as they have coupled with a Fed showing no signs of hiking interest rates is as strong a sign of inflation as you can get. Does Powell even have control of the bond market?

Bond yields are rising because investors expect inflation to return and almost desire higher interest rates sooner rather than later.

Five-year inflation expectations have also more than doubled from last year’s low and are now at around their highest levels since 2013.

“The rich world has come to take low inflation for granted. Perhaps it shouldn’t.” -The Economist.

As hedges against inflation, consider BUYING the SPDR TIPS ETF (SPIP), the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC), and the iShares Cohen & Steers REIT ETF (ICF).

Mid-Term/Long-Term

Add Emerging Market Exposure- Period

Figure 4- SPY, EWT, ERUS, THD, VNM, EWY, EIDO, ECH, EPU comparison chart- Sep. 1, 2020-Present

Since September, the SPDR S&P 500 ETF (SPY) has gained around 7.72%.

But if you compare that yield to that of my top emerging market picks for 2021, it has underperformed.

Only the iShares MSCI Russia ETF (ERUS) comes close with a return of 11.15% in that same timeframe.

The difference? Russia may be undervalued and have more than a 35% upside for its equities in the long-term.

Figure 5- Equities: Long-Term Return Expectations Developed Markets/Emerging Markets

But Russia is only one example of an emerging market with strong potential.

Consider this too.

With inflation on the horizon, a surge in commodity prices combined with shifting demographics could send other emerging markets upwards long-term.

PWC also believes that emerging markets (E7) could grow around twice as fast as advanced economies (G7) on average in the coming decades.

For 2021, the following are my BUYs for emerging markets and why:

iShares MSCI Taiwan ETF (EWT)- Developing country, with stable fundamentals, diverse and modern hi-tech economy, regional upside without China’s same geopolitical risks.

iShares MSCI Thailand ETF (THD)- Bloomberg’s top emerging market pick for 2021 thanks to abundant reserves and a high potential for portfolio inflows. Undervalued compared to other ETFs.

iShares MSCI Russia Capped ETF (ERUS)- Bloomberg’s second choice for the top emerging market in 2021 thanks to robust external accounts, a robust fiscal profile, and an undervalued currency. Red-hot commodity market, growing hi-tech and software market, increasing personal incomes. Compared to many other developed and emerging markets,

VanEck Vectors Vietnam ETF Vietnam (VNM)-Turned itself into an economy with a stable credit rating, strong exports, and modest public debt relative to growth rates. PWC believes Vietnam could also be the fastest-growing economy globally. It could be a Top 20 economy by 2050.

iShares MSCI South Korea ETF (EWY)- South Korea has a booming economy, robust exports, and stable yet high growth potential. The ETF has been the top-performing emerging market ETF since March 23.

iShares MSCI Indonesia ETF (EIDO)- Largest economy in Southeast Asia with young demographics. The fourth most populous country in the world. It could be less risky than other emerging markets while simultaneously growing fast. It could also be a Top 5 economy by 2050.

iShares MSCI Chile ETF (ECH)- One of South America’s largest and most prosperous economies. An abundance of natural resources and minerals. World’s largest exporter of copper. Could boom thanks to electric vehicles and batteries because of lithium demand. It is the world’s largest lithium exporter and could have 25% of the world’s reserves.

iShares MSCI Peru ETF (EPU)- A smaller developing economy but has robust gold and copper reserves and rich mineral resources.

Let’s take a look at how these emerging markets have performed since February 24.

Figure 6- SPY, EWT, ERUS, THD, VNM, EWY, EIDO, ECH, EPU comparison chart- Feb. 24-Present

What a difference a week can make. Peru was the leading emerging market in February, thanks to surging copper prices. “Clean metals” and “battery metals” like copper surged in February, and Peru, because of its extensive copper reserves, outperformed. Copper saw its best month in 5 years in February and popped by more than 19%.

But in just the last 3 days, copper has tanked by almost 6%, and the Peru ETF (EPU) has responded accordingly as the biggest laggard since February 24th, declining by virtually the same amount.

The only ETF to trade in positive territory since the 24th has been the Thailand ETF (THD)- and even that is barely up 1%.

Just a general slowdown, but the buying opportunities are plentiful.

Outside of the aforementioned country-specific ETFs, you can also BUY the iShares MSCI Emerging Index Fund (EEM) for broad exposure to Emerging Markets.

Long-Term

I remain convinced that the economic recovery is going better than expected as the progress in administering the vaccines improves. But it’s a blessing and a curse if it goes “too well.”

Continue to pay attention to complacency, overvaluation, bond yields, and especially inflation.

Time will tell what happens with the market. There could be more short-term pain. But slowly but surely, we are seeing more and more long-term buying opportunities. I will have a much better feeling for even more stocks and sectors for the second half of the year if they cool down even more, as I hope.

I think another down week or two could come before entering a powerful buying opportunity for the second half of the year. I’ve been calling for this buyable correction for weeks now, and the Nasdaq is already there. We may be at the beginning of the end of the pandemic, and despite the choppy waters right now, 2021 should be a big year for stocks.

Summary

Is it possible to become increasingly optimistic while at the same type becoming increasingly cautious?

That’s how I feel right now.

I was hoping that as the vaccines became more widespread and COVID numbers improved, the tug-of-war between optimism and pessimism would subside.

But I was wrong. We’re just battling bond yields and inflation now.

The crash and subsequent record-setting recovery we saw in 2020 is a generational occurrence. I can’t see it happening again in 2021. But as I said in the intro, I think a correction is inevitable. The Nasdaq, after all, is already there.

If you have heavy equity exposure, especially in struggling sectors like tech, take a breath, stay cool, and use it as a time to find buying opportunities.

How do you think many investors feel today who bought energy stocks at dirt-cheap valuations feel today? While energy lagged in 2020, it’s leading 2021.

Do not get caught up in fear and most of all:

NEVER TRADE WITH EMOTIONS.

Consider this too. You can sit out and be scared and wait for the perfect buying opportunity. But since markets bottomed on March 23rd, ETFs tracking the indices have seen returns like this: Russell 2000 (IWM) up 116.45%. Nasdaq (QQQ) up 79.29%. S&P 500 (SPY) up 71.11%. Dow Jones (DIA) up 68.91%.

Nobody knows “where” the actual bottom is for stocks, and what’s happening right now is far from a legitimate correction (outside of the Nasdaq). This is just a slowdown and a rotation.

In the long-term, markets always move higher and focus on the future rather than the present.

To sum up all our calls, I have a BUY call for

• the Invesco QQQ ETF (QQQ)- but buy selectively.

I have HOLD calls for:

• The iShares Russell 2000 ETF (IWM)
• the SPDR S&P ETF (SPY), and
• the SPDR Dow Jones ETF (DIA)

I am more bullish for all of these ETFs for the second half of 2021 and the long-term.

I also recommend selling or hedging the US Dollar and gaining exposure into emerging markets for the mid-term and long-term.

I have BUY calls on:

• The iShares MSCI Emerging Index Fund (EEM),
• the iShares MSCI Taiwan ETF (EWT),
• the iShares MSCI Thailand ETF (THD),
• the iShares MSCI Russia ETF (ERUS),
• the VanEck Vectors Vietnam ETF Vietnam (VNM),
• the iShares MSCI South Korea ETF (EWY),
• the iShares MSCI Indonesia ETF (EIDO),
• the iShares MSCI Chile ETF (ECH),
• and the iShares MSCI Peru ETF (EPU)

Additionally, because I foresee inflation returning as early as mid to late 2021…

I also have BUY calls on:

• The SPDR TIPS ETF (SPIP),
• the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC), and
• the iShares Cohen & Steers REIT ETF (ICF)

Thank you.

Matthew Levy, CFA
Stock Trading Strategist