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Market Commentary | March 04, 2021
The stock market rebounded in February after a slight January selloff as the S&P 500 increased by +2.8% for the month. The market is now higher by +1.7% for the year after increasing by +18.4% in 2020.
One of the biggest financial stories of the month was the increase in long-term interest rates. The 10-Year Treasury increased to 1.40% in February, up from 1.07% at the end of January and 0.91% at the end of last year. The increase in long-term interest rates is driven by expectations that the massive amount of monetary and fiscal stimulus combined with the vaccine rollout will lead to higher levels of economic growth and inflation. Keep in mind that interest rates fell to all-time lows during the pandemic and they should increase as economic growth picks up. Also, that at 1.40% the 10-Year Treasury is still quite low by historical standards given that the rate has averaged 3.70% over the last 25 years. We will also highlight that the rise in interest rates has taken some of the air out of the most speculative areas of the stock market. Companies with a great story but no foreseeable earnings can thrive in environments where money is cheap and liquidity is overflowing, but probably less so when interest rates move higher. We view this as a positive development for the long-term health of the stock market.
From an asset allocation perspective, our equity holdings remain tilted toward high quality US stocks and our fixed income continues to focus on achieving ballast, stability, and income while accounting for short-term cash needs. We will continue to rely on our time-tested investment process, based on risk management, asset allocation, and security selection, to utilize any volatility as an opportunity to reposition portfolios.
As we have done in the past, we will provide an update on the major factors driving the market:
Data on the coronavirus in terms of daily cases, hospitalizations, and vaccine distribution continues to improve. New Cases: According to The Covid Tracking Project, the 7-day average of new cases increased by about 67,000 per day, down from a peak of nearly 250,000 per day at the start of the year. Hospitalizations: The number of people currently hospitalized ended the month at about 47,000, down from a peak of nearly 130,000. Vaccine Distribution: According to the CDC, over 96 million doses of the vaccine have been distributed while nearly 50 million people have received at least one dose. Vaccine distribution and doses continued to ramp up throughout the month. Thus far, the vaccines being administered are solely from Pfizer and Moderna. Johnson and Johnson (JNJ) Vaccine: The FDA granted emergency-use authorization and the CDC authorized distribution of Johnson and Johnson’s vaccine. JNJ expects to ship 4 million doses the first week of March, 16 million by the end of March, and 100 million by the end of June. The Johnson & Johnson vaccine is a single dose and requires standard refrigeration.
Fed Chair Powell submitted the Semiannual Monetary Policy Report to Congress and testified before the House and Senate late in the month. Chair Powell reiterated the Fed’s commitment to maintain accommodative monetary policy and he shrugged off any concerns about the recent rise in interest rates and inflation readings. Powell sated that, “the economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.” Recall that interest rates are near zero and the Fed is purchasing at least $120 billion per month of Treasuries and agency mortgage-backed securities. Market participants are beginning to question whether the economy will need the current level of monetary stimulus once the vaccine rollout ramps up and if the Fed’s policies are contributing to some of the speculation in certain areas of the market. We suspect that the Fed will keep rates at zero but may start thinking about tapering their asset purchases toward the end of the year as the economic recovery gains steam.
Please see our Client Question of the Month on The Federal Reserve, which details the importance of the Fed’s policies and impact the FOMC has on the economy, interest rates, and stock prices.
On February 27th, the House passed President Biden’s 1.9 trillion Coronavirus Rescue Plan by a vote of 219-212 largely along party lines. The bill includes direct checks of $1,400, enhanced unemployment benefits, funding for vaccine distribution, and aid to state and local governments. The Senate will now begin negotiations. Democrats are aiming to finalize an agreement before federal unemployment benefits expire on March 14th. We expect the bill to undergo intense negotiations and the ultimate size might end up being a little less than what is currently proposed.
The US economy decreased by -3.5% in 2020 and now 2021 GDP projections are starting to increase as the virus subsidies and the vaccine rollout increases. The current consensus estimate for Real GDP growth in 2021 now stands at +5.0%. Fed Chair Powell recently stated the economy could expand by about +6% this year. Consumer Spending: According to high frequency data, consumer spending has now reached its pre-virus level, up from an April 2020 bottom of 82% (Goldman Sachs). Consumer spending data is critical as it drives about 70% of GDP. Labor Market: The unemployment rate is currently at 6.3%. However, the labor market is one of the weaker areas of the economy as total employment is about 10 million below its February 2020 level. Going Forward: While some parts of the economy are doing extremely well (manufacturing) while others are lagging (labor market), we expect that activity will increase up in the spring and summer as more people are vaccinated.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.
The prices of small cap stocks and mid cap stocks are generally more volatile than large cap stocks.
All indexes mentioned are unmanaged indexes which cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The S&P Midcap 400 Stock Index is an unmanaged index generally representative of the market for the stocks of mid-sized US companies.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.
The MSCI Europe Index captures large and mid cap representation across 15 Developed Markets (DM) countries in Europe*. With 445 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe.
The MSCI Japan Index is designed to measure the performance of the large and mid cap segments of the Japanese market. With 322 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Japan.
The MSCI India Index is designed to measure the performance of the large and mid cap segments of the Indian market. With 78 constituents, the index covers approximately 85% of the Indian equity universe.
The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa. Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.
The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.
The Barclays Capital U.S. Credit Bond Index measures the performance of investment grade corporate debt and agency bonds that are dollar denominated and have a remaining maturity of greater than one year.
The Barclays Capital Municipal Bond Index is a broad market performance benchmark for the tax-exempt bond market, the bonds included in this index must have a minimum credit rating of at least Baa.
The Barclays Capital US Corporate High Yield Bond index is an index representative of the universe of fixed-rate, non-investment grade debt.