Economic Update 2-22-2021

• Economic data for the week included positive surprises in retail sales and industrial production, while housing results were mixed for the past month—although the recovery trend remains in place.

• Global equity markets were mixed to lower globally, with the U.K. as the best performer. Bonds pulled back globally, as interest rates again nudged higher due to fears of stimulus leading to eventual inflation. Commodities gained ground, led by strength in industrial metals and natural gas.

U.S. stocks were mixed to lower for the week as higher interest rates began to rain on the
bullish parade, likely not helped by severe weather nationwide that put a damper on activity.
Overall, however, sentiment has remained positive due to continued hope for a
Congressional fiscal stimulus package, strong corporate earnings relative to expectations,
and continued improvement in getting Covid vaccines distributed. At the same time, some
concern remains about specific new Administration policies, such as the timing and
magnitude of a minimum wage increase.

By sector, conditions were mixed, with energy and financials leading with gains of several
percent each—the former due to commodity price strength and latter from higher interest
rates that improve net interest margins. Laggards with negative returns included growth
stocks, such as technology, as well as defensive areas health care, consumer staples, and
utilities. Real estate also lost some ground along with moves higher in rates.

Foreign stocks behaved similarly to those in the U.S., along with sentiment around Covid,
and economic recovery hopes. European earnings have fared better as well, which has put
pressure on interest rates—causing these to become ‘less negative.’ Strength in the U.K.
appeared related to an upcoming easing of lockdowns, as virus cases have fallen. Emerging
markets were down also last week, with the exception of Turkey, which kept rates steady (at
a policy level of 17%), due to some stabilization in currency and inflation metrics.

U.S. bonds fell back as interest rates continued to rise, notably on the long end of the curve.
Treasuries outperformed corporates on the investment-grade side, while high yield and
senior loans outperformed other groups. The dollar was little changed on the week, but
developed market and emerging market bonds lost significant ground.

Commodities rose on the week, with industrial metals gaining sharply, followed by
agriculture and energy, while precious metals pulled back. The price of crude oil rose a few
dollars mid-week before falling back to just over $59/barrel, resulting in a net decline. The
rise in energy prices were partially related to severe weather issues in Texas, whose energy
grid is separated from the rest of the nation. Petroleum refiners there are not ‘hardened’ to
extreme cold weather as they are in, say, Alberta, Canada, so the shutdowns over the past
week have caused unleaded gas prices to spike. Sources of possible disruptions on the
processing, storage, and distribution side often go unappreciated until there’s a crisis.

Period ending 2/19/2021	1 Week (%)	YTD (%)
DJIA	0.16	3.17
S&P 500	-0.68	4.23
NASDAQ	-1.54	7.75
Russell 2000	-0.98	14.88
MSCI-EAFE	0.27	4.07
MSCI-EM	0.09	10.88
BBgBarc U.S. Aggregate	-0.57	-1.80

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2020	0.09	0.13	0.36	0.93	1.65
2/12/2021	0.04	0.11	0.50	1.20	2.01
2/19/2021	0.04	0.11	0.59	1.34	2.14