-Darren Leavitt, CFA
A prominent rotational trade out of mega-cap growth stocks into value-oriented cyclical issues extended US equity indices gains in March. Covid-19 inoculations continued to ramp up in the US as broader segments of the population became eligible to receive the vaccine. It was a different story in the EU block where vaccination rates have lagged, and infighting over the distribution of vaccine supplies has strained political ties. Robust economic data coupled with the passing of the 1.9 trillion dollar stimulus bill and rhetoric regarding a 2.3 trillion dollar infrastructure spending plan strengthened inflation concerns and induced a significant sell-off in longer-dated US Treasuries. Corporate headlines throughout the month also confirmed the pick-up in economic activity.
For the month, the S&P 500 gained 4.24%, the Dow tacked on 6.62%, the tech-heavy NASDAQ added 0.41%, and the Russell 2000 inched higher by 0.88%. The US Treasury curve steepened significantly over the month, which has all kinds of ramifications for investors to consider. The 2-year note yield increased two basis points to 0.16%, while the 10-year note yield increased twenty-nine basis points to close at 1.75. The 10-year yield rose 85 basis points in the first quarter, the largest quarterly move since 1980. Oil prices were little changed for the month. WTI lost just over 3% or $2.35 to close at $59.19. OPEC did increase its output mandate from May to July to accommodate higher demand. Gold prices fell $13.20 to close at $1715.20 an Oz.
Investors experienced similar market action in March as we did in February. The US economy appears to be emerging out of a Covid coma, and with it, investors are rotating into economically sensitive sectors of the market that have lower valuations. Energy, Financials, Materials, and Industrials have come into favor as mega-cap tech names have taken a back seat. Small caps, which are generally more influenced by the domestic economy, have also done quite well. This comes as more vaccine shots are going into American arms, and vaccination protocols have broadened to include most of the population. The increase in vaccination rates was needed to reopen the economy. Travel data is up, lockdown measures have been reduced or eliminated, kids are back in school, and people just want to get out and get on with their lives. This comes as personal savings rates are high and another set of stimulus checks has hit bank accounts- money to spend on restaurants, bars, concerts, movies, and traveling. The resurgence of demand is likely to affect the price of goods and services. We are currently seeing prices increase at the producer level. That increase is likely to be passed on to the consumer- all of this is inflationary and has been one reason we have seen longer-dated interest rates rise over the last few months. Some economists believe that the possible increase in prices will be transitory and that after a few quarters, it will subside as supply catches up with demand. As I mentioned, higher rates have enormous ramifications for asset prices and could lead to certain asset classes selling off. Higher valuation equities are more susceptible to higher rates hence the rotation we have seen of late.
One just needs to point to the last two Employment Situation Reports to see the labor market’s progress. The February reading showed 379k non-farm payrolls created and the unemployment rate falling from 6.3% to 6.2%. The March reading showed that 916k non-farm payrolls had been created and that the unemployment rate had dropped to 6%. Similarly, we have seen better than expected PMI data on both the Manufacturing and Services fronts. It is not a surprise to see sentiment indicators also ticking up. The most recent Consumer Confidence indicator came in at 109.7, well above the 97 consensus estimate.
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