Monthly Economic Update, March 2021
Submitted by Kaizen Financial Advisors, LLC on March 16th, 2021
This Month’s Recap
- Decreasing COVID-19 infections and evidence of economic recovery lifted stocks
- Rising Yields fuels sector rotation
- U.S. Dollar appreciated over 2% year-to-date
U.S. Markets
Stocks notched a solid gain in February thanks to growing optimism surrounding the economic recovery and decreasing number of COVID-19 infections.
The Dow Jones Industrial Average led, picking up 3.17 percent. The Standard & Poor’s 500 Index rose 2.61 percent, while the Nasdaq Composite added 0.93 percent.1
Singular Focus
Investors focused on fundamentals during the month as the U.S. presidential election and a social media trading frenzy moved to the background.
Attention was centered on three key inputs: corporate earnings, economic data, and interest rates—all of which influence longer-term stock valuations.
Corporate Earnings
With the fourth quarter earnings season coming to a close, many companies surprised analysts.
Of the 83 percent of S&P 500 companies that delivered reports, 79 percent of those reported results that exceeded Wall Street expectations. Upon closer evaluation these companies, on average, reported earnings that were 14.6 percent above estimates, which are substantially above the 6.3 percent five-year average.2
Communication Services and Information Technology were the sectors that lead the positive earnings surprises. Real Estate, Energy, and Utilities lagged in beating earnings estimates.3
Economic Data
Economic strength was evident in January’s retail sales, industrial production, and durable goods orders. However, the labor market remained stubbornly weak. The economic recovery narrative was supported by falling COVID-19 numbers, as well as improvements in vaccine distribution.
Bond Yields
Treasury yields rose last month, with 10-year yields closing February at 1.46 percent and 30-year yields at 2.11 percent. Bond yields may increase for several reasons, some of which may be good (strong economic growth) and some concerning (accelerating inflation).4
Sector Scorecard
Industry sectors were mixed in February, with Communication Services (+2.96 percent), Energy (+18.44 percent), Financials (+9.36 percent), Industrials (+4.15 percent), Materials (+0.69 percent), and Real Estate (+2.29 percent) advancing. Meanwhile, losses were felt in Consumer Discretionary (-6.00 percent), Consumer Staples (-2.10 percent), Health Care (-4.03 percent), Technology (-2.94 percent), and Utilities (-7.24 percent).5
What Investors May Be Talking About in March
Although the Fed remains committed to its zero-interest-rate policy, investors may be monitoring how the financial markets react to any pickup in inflation.6
Investors appear concerned about the Fed’s protracted easy monetary stance and federal fiscal spending in response to the pandemic.
For now, inflation remains within the Fed’s target range. However, expectations are rising, with the five-year forward expectations rate reaching a level not seen since 2019.7
World Markets
A pickup in global economic activity spurred international stocks higher, with the MSCI-EAFE Index climbing 5.16 percent.8
Broad gains were made in major European markets. France picked up 5.63 percent, Germany 2.63 percent, and the U.K. 1.19 percent.9
Stocks in the Pacific Rim markets also performed well, with solid numbers in Japan and Hong Kong. The Hang Seng index is up 6.42 percent year-to-date.10
Indicators
Gross Domestic Product: The nation’s economic growth for the fourth quarter was revised higher from 4.0 percent to 4.1 percent.11
Employment: The U.S. economy added 49,000 jobs in January, as continued weakness in the leisure and hospitality industry dragged down overall results. The unemployment rate fell to 6.3 percent due to the declining number of people looking for work.12
Retail Sales: Retail sales rose 5.3 percent, propelled by strong gains in home improvement, work-from-home (e.g., furniture and electronics), and spending in restaurants and bars.13
Industrial Production: Industrial production jumped 0.9 percent, with gains in manufacturing and mining offsetting a decline in utilities.14
Housing: Housing starts posted a disappointing 6.0 percent decline, as single-family home construction dropped 12.2 percent. However, a 10.4 percent rise in homebuilding permits suggested that the housing market remained healthy.15
Existing home sales edged 0.6 percent higher, as a limited supply of homes for sale drove a 14.1 percent price increase from a year earlier.16
New home sales rose 4.3 percent in January, the highest level in three months and above consensus estimates.17
Consumer Price Index: Inflation rose 0.3 percent to settle at 1.4 percent for the 12-month period, which ended in January.18
Durable Goods Orders: Orders for long-lasting goods rose 3.4 percent, marking the ninth straight month of increases and the most significant leap since July 2020.19
The Fed
Minutes from the last Federal Open Market Committee (FOMC) meeting indicate that the Fed has reaffirmed its policy to keep short-term interest rates at current levels and continue its bond purchase program, citing uncertainty about the economy’s continued recovery.
While some Fed officials thought that near-term inflation might exceed its 2 percent target, they also believed that any price pressure would be short-lived.20
“At the Federal Reserve, we are strongly committed to achieving the monetary policy goals that Congress has given us: maximum employment and price stability,” Federal Reserve Chair Jerome Powell stated in his semiannual monetary policy report to the Congress.21
“Since the beginning of the pandemic, we have taken forceful actions to provide support and stability, to ensure that the recovery will be as strong as possible, and to limit lasting damage to households, businesses, and communities.”
|
MARKET INDEX |
Y-T-D CHANGE |
February 2021 |
|
S&P 500 |
1.72% |
2.76% |
|
Int’l Developed* |
1.15% |
2.24% |
|
Emerging Mrkts* |
3.85% |
0.76% |
|
REITs* |
3.80% |
3.25% |
|
Aggregate Bonds |
-2.15% |
2.76% |
|
|
||
|
BOND YIELD |
Dec 31, 2020 |
Feb 26, 2021 |
|
10 YR TREASURY |
0.93% |
1.44% |
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year Treasury real yield = projected return on investment, expressed as a percentage, on the U.S. government’s 10-year bond.
*International Developed is represented by the MSCI EAFE NR USD index. Emerging markets is represented by the MSCI EM NR USD index. REIT
is represented by the FTSE Nareit All Equity REITs TR USD index. Aggregate Bonds is represented by the BBgBarc US Agg Bond TR USD index.
U.S. Dollar’s Surprising Strength
Last week, the U.S dollar gained 0.93% against a basket of international currencies—a relatively big move in the currency market. Year-to-date the dollar has appreciated over 2%.22
U.S. dollar strength this year has defied the expectations of many analysts who anticipated that a global economic recovery would prompt a shift away from the safe harbor of the dollar toward non-dollar denominated assets.
However, rising U.S. yields and a faltering economic rebound in Europe have instead propelled the U.S. dollar higher, raising concerns about tight financial conditions abroad and its potential adverse impact on an emerging markets recovery.
If you would like to discuss this analysis or any other financial-related topic, we are here for you. Please do not hesitate to reach out to a Kaizen Advisor.
CITATIONS:
1. The Wall Street Journal, February 28, 2021
2. FactSet Research, February 19, 2021
3. FactSet Research, February 19, 2021. “Earnings Insights”
4. U.S. Department of the Treasury, February 2021
5. SectorSpdr.com, February 28, 2021
6. The Wall Street Journal, February 24, 2021
7. Fred.StLouisFed.org, February 2021
8. MSCI.com, February 28, 2021
9. MSCI.com, February 28, 2021
10. MSCI.com, February 28, 2021
11. CNBC.com, February 25, 2021
12. The Wall Street Journal, February 5, 2021
13. The Wall Street Journal, February 13, 2021
14. FederalReserve.gov, February 17, 2021
15. CNBC.com, February 18, 2021
16. The Wall Street Journal, February 19, 2021
17. Bloomberg.com, February 24, 2021
18. CNBC.com, February 10, 2021
19. The Wall Street Journal, February 25, 2021
20. The Wall Street Journal, February 17, 2021
21. FederalReserve.gov, February 23, 2021
22. The Wall Street Journal, March 5, 2021
