Market Commentary | March 15, 2021

Bull? Bear? How About a “Bunny” Market?

Bull? Bear? How about a “Bunny” market?

Key Points

  • 2021 seems to be more of a “bunny” market with the stock market hopping up and down.

  • In our view, market jitters over the impact of rising interest rates on economic activity seem to be premature.

  • Business investment appears strong with capital spending indicators remaining robust and strategic corporate M&A deals multiplying like bunnies in the first quarter even as rates have climbed.

This probably isn’t the start of a bear market, but it may feel like less a bull market compared with last year’s charge. The progress on vaccinations and re-openings coupled with the rise in interest rates and worries over the potential withdrawal of central bank stimulus next year has led this to be more like a “bunny” market, with the stock market hopping up and down. 

A “bunny” market?


Source: Charles Schwab, Bloomberg data as of 3/12/2021.

Pulling a rabbit out of a hat

An increase in interest rates tends to raise the cost of borrowing, which in theory discourages business investment in equipment, capacity, and employment. This contraction in capital spending can slow growth in the economy, earnings and jobs. In practice, the relationship between business investment and interest rates is more ambiguous. Often, rising demand can accompany rising interest rates, compelling businesses to expand despite the higher costs. Recent data seems to be following this latter scenario.

While the 10-year U.S. Treasury bond yield rose about one percentage point since early August, surveys of business optimism and investment continue to rise as well. This suggests higher rates are having little to no negative impact on business plans at this time.

  • Japan’s machine tool orders jumped 37% in February from a year ago, reaching the fastest pace in three years, according to the Japan Machine Tool Builders’ Association. Producers cited increasing foreign business demand for machine tools used to produce goods such as computers, smartphones and semiconductors, in response to global chip shortages.

Global orders for equipment from Japanese producers have jumped


Source: Charles Schwab, Bloomberg data as of 3/12/2021.

  • Last week’s U.S. report on orders for U.S. capital goods (used to make products excluding the defense and aircraft industries) for January continued to show soaring demand. The preliminary report for February is due out next week and is expected by economists to carry on the upward trend.
  • German businesses are increasingly optimistic about economic momentum picking up this year, despite extended lockdowns to combat new variants of the virus and a slow start to vaccinations. The Ifo Institute’s gauge of expectations for the next six months rose to 94.2 in February, soundly beating economists’ estimates. The business climate index also gained, with companies slightly more upbeat about their present situation.

Business investment appears to be strong, ramping up even as interest rates have steadily climbed over the past six months. 

Deals multiply like bunnies

While physical distancing has been the norm for individuals, companies have been joining together at a near record pace this year. Strategic corporate M&A deals have multiplied like bunnies. As of March 12, announced global merger and acquisition deals totaled $1.1 trillion for this quarter, putting the first quarter of 2021 on track to be one of the biggest ever, as you can see in the chart below. 

M&A deals near record levels in first quarter


Source: Charles Schwab, Bloomberg data as of 3/12/2021.

Although these deals were likely in the making for some time, the ongoing rise in bond yields hasn’t slowed their pace or kept them from being announced, implying that business leaders’ outlook on investment remains positive even as interest rates continue to climb.

Keep on hopping

Market jitters over the consequences of an interest rate rise may be premature. Rates are still low on a historical basis, despite their sharp ascent from last summer’s all-time lows. Should interest rates continue to make their way higher just as rapidly as they have over the past 6 months, climbing at an annualized pace of two percentage points, they could begin to weigh on growth.

There are a variety of clashing factors affecting the stock market this year, including worries over rising interest rates countered by the confidence seen in booming business investment, and robust M&A activity. We expect the bunny market to continue hopping around in the weeks ahead, as it reacts to these factors.

Michelle Gibley, CFA®, Director of International Research, and Heather O’Leary, Research Analyst, contributed to this report.