Economic Update 3-08-2021
- Economic data for the week included improvements in manufacturing and construction spending, while services results fell back a bit. The February employment situation report came in stronger than expected, although still being negatively affected by winter weather during the month.
- U.S. equity markets gained on net for the week, as several negative days based on investors digesting rising interest rates, were offset by a finalization of stimulus, stronger economic numbers, and the availability of a new third vaccine. Domestic markets outperformed foreign stocks, which were little changed on net. Bonds suffered for another week as interest rates ticked higher upon expectations for economic reflation and aftermath of the massive stimulus package. Commodities rose as a whole due to a spike in oil prices, while other segments, such as metals, declined.
U.S. stocks were mixed, with broader indexes ending higher after a mid-week downturn was offset by a rally late in the week, helped by a stronger jobs report. Despite continued headline concerns about rising interest rates, optimism about the newly-approved Johnson & Johnson Covid vaccine, and related production and distribution partnerships seemed to rescue sentiment a bit. The stimulus bill appeared to be close to a done deal, with finalization expected this coming week.
By sector, energy stocks spiked by 10% along with a rally in oil prices, followed by continued strength in ‘value’ financials and industrials. Technology and consumer discretionary stocks lost ground last week, in keeping with the ‘growth rout’—the consumer sector led down by a correction in Tesla. Real estate shares also declined along with higher rates, which threaten financing conditions.
Before some recovery Friday, the Nasdaq index had fallen nearly -10% from its highs, close to correction territory, as the largest technology firms have been punished by higher valuations and rising interest rates. The broader S&P, on the other hand, was ‘only’ down -5%—largely due to the positive influence of its cyclical components. This has always been the danger in owning the Nasdaq exclusively. While the growth in its technology and communications holdings have been attractive to investors, the ownership is highly concentrated (at 45% and 20% of the index, respectively).
Sometimes sell-offs/corrections happen for no immediately identifiable reason, for ‘hypothetical’ reasons (like a fear of not-yet-present inflation), or reasons that might be counterintuitive. In this case, it stems from the fear of rising interest rates, after a decade of extremely accommodative policies. The reality, though, is that rising rates tend to coincide with a recovering economy—as long as the rate increases occur at a measured pace. Comments from Fed chair Jerome Powell and other Fed officials last week seemed to be less reassuring to markets, through descriptions as ‘patient,’ compared to more dovish remarks he made to the Senate in an earlier week.
Moving from ‘extremely low’ rates to ‘moderately low’ rates (with still historically-low yields on an after-inflation ‘real’ basis) is quite different than moving to ‘high’ rates. A recovering economy behind the higher rates could also likely deliver the positive of stronger earnings growth. The irony of rising interest rates is that they can have an effect of tightening financial conditions, which could cause the Fed to double-down on keeping policy accommodative, if it was felt to be necessary. This was one of the faster moves interest rates have taken in recent memory, which means the trade could be ‘overbought.’
Foreign stocks were flat to slightly higher, held back by currency impacts. The U.K. gained several percent on the week, to lead most regions, after a plan to re-open the economy and calls for more stimulus were announced. In emerging markets, cyclically-sensitive nations such as India and Russia outperformed, while China lost several percent, after officials noted concerns there about leverage levels. This is in keeping with China leading the world’s economic recovery; in so doing, they could be the first to pull back on stimulus.
U.S. bonds fell back again, with interest rates moving higher along with finalizing the Congressional stimulus package, due to its large size, as well as the economic recovery and associated inflation pressures. Longer-duration treasuries suffered the most last week, while high yield and floating rate bank loans earned positive returns. Foreign bonds lost significant ground last week in both developed and emerging markets due to the U.S. dollar rising by a percent.
Commodities rose by several percent for the week, despite the stronger dollar. However, this was driven completely by energy, as agriculture and metals lost ground. The price of crude oil rose over 7% to over $66/barrel. After initial deliberations by the OPEC+ countries about possibly raising production to keep prices contained, the group decided against it. However, rather than meeting semiannually as they used to, the group now meets monthly, which allows for more frequent review of conditions.
|Period ending 3/5/2021||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||-0.80||-2.93|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.
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