Market Commentary – March 2021
As we closed out 2020, the overwhelming sentiment entering January was that it couldn't get much worse. Unfortunately, January did not start out on a high note. During the first week of the month, protesters stormed the United States Capitol, leading to violence, the disruption of the presidential election certification, and several deaths. Nevertheless, the inauguration of Joe Biden as our 46th president took place as scheduled. January also saw the emergence of virus mutations, the uneven distribution of COVID-19 vaccines, and the gradual relaxation of pandemic-related restrictions. Also, during January, a new phenomenon in stock price manipulation emerged involving several companies, including a video-game company. Ultimately, stocks closed the month mixed, with the Russell 2000 and the Nasdaq gaining, while the Dow and the S&P 500 fell. Treasury yields, the dollar, and crude oil prices advanced.
Major equity indexes reached record highs in February, only to pull back by the end of the month. Fearful that inflationary pressures would mount, investors favored value stocks over growth, pushing small-cap and mid-cap stocks higher. Investors were encouraged by President Joe Biden's $1.9 trillion stimulus proposal, accelerated vaccine distribution, and better-than-expected fourth-quarter corporate earnings. By the end of February, each of the benchmark indexes listed here posted gains led by the Russell 2000, which advanced more than 6.0%. The yield on 10-year Treasuries continued to grow, crude oil prices pushed past $61 per barrel, and the dollar rose. Only 50,000 new jobs were added in February, although unemployment claims decreased.
Stocks continued to push higher in March. Several of the benchmark indexes posted noteworthy gains including the Dow (6.6%), the S&P 500 (4.2%), and the Global Dow (4.0%). The Russell 2000 (0.9%) and the Nasdaq (0.4%) advanced moderately. Among the sectors, industrials (8.1%), utilities (7.4%), consumer staples (6.5%), and materials (6.4%) led the way. Treasury yields and the dollar advanced, while crude oil prices and gold fell.
Overall, the first quarter was definitely eventful. Additional federal stimulus payments lined many pocketbooks; a group of amateur traders banded together through social media to drive shares of a video gaming company to astronomical heights; interest rates jumped, stoking fears that inflationary pressures were rapidly building; and equities ultimately enjoyed robust returns. The small caps of the Russell 2000 gained nearly 12.5%, the Global Dow climbed 9.4% and the large caps of the Dow (7.8%) and the S&P 500 (5.8%) posted solid gains. Tech shares, which had driven the market for much of 2020, slumped during the quarter, but still gained enough ground to push the Nasdaq up by almost 3.0%. Energy shares posted some of the biggest gains in the quarter, with that market sector surging over 30.6%. Financials jumped 18.0%, followed by industrials (12.0%), materials (10.8%), and real estate (10.0%). Only information technology failed to advance by the end of the quarter. The yield on 10-year Treasuries climbed more than 80 basis points. Crude oil prices increased and the dollar rose. Gold prices fell nearly 10.0% in the first quarter. Year to date, the Russell 2000 is well ahead of its 2020 year-end closing value, followed by the Global Dow, the Dow, the S&P 500, and the NASDAQ.
|Market/Index*||2020 Close||As of March 31 st||Monthly Change||Quarterly Change||YTD Change|
|S & P 500||3,756.07||3,972.89||4.24%||5.77%||5.77%|
|Federal Funds||0.00% – 0.25%||0.00% – 0.25%||0 bps||0 bps||0 bps|
|10-yr Treasury||0.91%||1.74%||28 bps||83 bps||83 bps|
*Chart reflects price changes, not total return
Last Month's Economic News
- Employment: There were 379,000 new jobs added in February after only 49,999 new jobs were added in January. In February, the unemployment rate fell by 0.1 percentage point to 6.2%, and the number of unemployed persons decreased by 150,000 to 10.0 million. Although both measures are much lower than their April 2020 highs, they remain well above their pre-pandemic levels in February 2020 (3.5% and 5.7 million, respectively). Among the unemployed, the number of persons on temporary layoff decreased in February by 517,000 to 2.2 million. This measure is down considerably from the recent high of 18.0 million in April but is 1.5 million higher than its February 2020 level. The labor force participation rate was unchanged at 61.4%, and the employment-population ratio inched up 0.1 percentage point to 57.6%. Average hourly earnings increased by $0.07 to $30.01 in February and are up 5.3% from a year ago. The average work week declined by 0.3 hour to 34.6 hours in February.
- FOMC/interest rates: The Federal Open Market Committee met in March. According to the Committee statement, employment has turned up recently and, despite investor concerns, inflation continues to run well below 2.0%. The Committee continues to hold interest rates at their current 0.00%-0.25% target range and expects no change through 2023.
- GDP: The gross domestic product advanced at an annual rate of 4.3% in the fourth quarter of 2020. The GDP increased 33.4% in the third quarter after contracting 31.4% in the second quarter. Consumer spending, as measured by personal consumption expenditures, increased 2.2% in the fourth quarter after surging 41.0% in the third quarter. Nonresidential (business) fixed investment climbed 13.1% following a 22.9% increase in the third quarter; residential fixed investment continued to advance, increasing 36.6% in the fourth quarter after soaring 63.0% in the prior quarter. Exports advanced 22.3% in the fourth quarter (59.6% in the third quarter), and imports (which are a negative in the calculation of GDP) increased 29.8% in the fourth quarter (93.1% in the third quarter). Federal nondefense government expenditures decreased 8.9% in the fourth quarter following a third-quarter decline of 18.3% as federal stimulus payments and aid lessened. The GDP fell 3.5% in 2020 after increasing 2.2% in 2019. Personal consumption expenditures dropped 2.63%; nonresidential fixed investment declined 0.54%; residential fixed investment rose 0.23%; exports dropped 1.47%; imports rose 1.33%; and nondefense government spending advanced 0.15%.
- Inflation/consumer spending: Inflationary pressures eased in February. According to the latest Personal Income and Outlays report, consumer prices edged up 0.2% in February after advancing 0.3% in January. Prices have increased 1.6% from February 2020. Excluding food and energy, consumer prices increased 1.4% over the last 12 months. Both figures are well below the Fed's 2.0% target inflation rate. Personal income fell 7.1% in February after climbing 10.0% in January, and disposable personal income dropped 0.8% following January's 11.4% jump. The decrease in personal income in February is more a reflection of stimulus payments received in January, which accounted for that month's soaring income estimates. Consumer spending declined 1.0% in February after advancing 3.4% (revised) in January. Over the last 12 months, personal consumption expenditures (consumer spending) dipped 2.7%.
- Manufacturing: The manufacturing sector took a step backward last February as industrial production decreased 2.2%, the first such decline since last October. According to the Federal Reserve's report, industrial production advanced 1.1% in January. Manufacturing output fell 3.1% in February following January's 1.0% increase. Mining production dropped 5.4% in February after advancing 2.3% in January. February saw the output of utilities increase 7.4% after declining 1.2% the prior month. Total industrial production in February was 4.2% lower than its year-earlier level. According to the report, the severe winter weather in the south-central region of the country in mid-February accounted for the bulk of the decline in output for the month.
- For the first time in 10 months, new orders for durable goods decreased, falling 1.1% in February after climbing 3.5% in January. Transportation, down following five consecutive monthly increases, led the decrease, sliding 1.6%. New orders for nondefense capital goods rose 5.6% in February after increasing 6.2% the previous month. A 103.3% increase in nondefense (commercial) aircraft and parts drove the jump in nondefense capital goods. Defense capital goods followed a 0.9% January decline by nosediving 10.6% in February.
- International markets: Inflationary pressures may be ramping up globally. February saw consumer prices increase in several nations, including France, Germany, Italy, Canada, China, and Japan. In the markets, the EURO STOXX Europe 600 Index gained about 4.1% in March; the United Kingdom's FTSE inched up 1.1%; Japan's Nikkei 225 fell 1.3%; and China's Shanghai Composite Index plunged nearly 4.0%.
- Consumer confidence: The Conference Board Consumer Confidence Index® surged in March to its highest reading in a year. The index stands at 109.7, up from 90.4 in February. The Present Situation Index, based on consumers' assessment of current business and labor market conditions, increased from February's 89.6 to 110.0 in March. The Expectations Index, based on consumers' short-term outlook for income, business, and labor market conditions, fell from 90.9 in February to 109.6 in March.
Eye on the Year Ahead
The economy in general, and the stock market in particular, should continue to progress as more vaccines are rolled out and more jobs are made available. Investors will continue to watch for signs of escalating inflation, despite the Federal Reserve's forecasts to maintain interest rates at their present levels through 2023.
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