Conway’s QuickTake: Week of February 22, 2021
Here’s What Happened Last Week:
Most major indexes were down for the short trading week as rising rates weighed on stocks. Increasing rates were particularly negative for fast growing technology stocks as valuations adjusted to reflect a higher discount rate. At the same time, it benefited financial stocks such as banks, as higher rates have historically translated to increased lending margins. Value outperformed growth across the board as energy and financials were the best performing sectors for the week. Large-caps also generally outperformed small-caps. Trading volumes fell back from record levels in January following one of the largest option expiration dates ever last month. So far this year, value stocks maintain a slight lead over growth names while small-caps have well exceeded large-caps – continuing the trend from late 2020.
Inflation concerns have increasingly emerged domestically. Producer prices rose 1.3% in January, the largest increased since December 2009. Bloomberg reported that vaccine supply is expected to double by April as additional candidates get approved. While the increased pace of vaccinations is encouraging, there are still lingering concerns that the vaccines might be less effective fighting against the newer strains. Retail sales rose 5.3% last month, partially attributable to the $600 direct payments to many lower- and middle-income Americans. Weekly jobless claims rose to 861,000 last week, the most since mid-January and supporting the case for further stimulus. Housing data surprised to the downside as housing starts fell back meaningfully from their recent decade high.
Both developed and emerging non-U.S. equities rose modestly last week in U.S. Dollar terms. Emerging market equities remain a top performer so far in 2021. European shares were marginally higher supported by positive quarterly earnings. The widely watched Japanese Nikkei 225 Average broke 30,000 for the first time in more than 30 years. Notably, it still remains below its all-time peak of 38,597 which it reached in 1989. Chinese stocks were down slightly after the People’s Bank of China (PBoC) pulled liquidity from the financial system, dampening some purchasing momentum.
Similar reflation fears are emerging in Europe. Strong PMI data also put upward pressure on yields which are breaking recent highs, although they still remain historically low. Several major European nations, such as the UK and Switzerland, are in the process of easing lockdowns amongst improving infection data. Chinese demand has helped support Japan’s economy into the new year. The Japanese economy grew at a 12.7% annualized pace over the fourth quarter, although it still contracted by 4.8% over 2020. Chinese economic data was muddied by the Lunar New Year holiday as travel was largely discouraged after a COVID flareup in northern China. Travel fell 71% over the three weeks after the government dissuaded citizens from using public transportation.
Amidst the sell-off, rates climbed to the highest levels in almost a year as the 10-year reached 1.33%. The spread between the 5-year and 30-year bond steepened to 1.55%, a level last seen in 2015. The move out the curve comes in response to the ongoing fears of reflationary pressures and stimulus decisions. The corporate spread week-to-date for the USD Investment Grade All Sector option adjusted spread (OAS) was modestly tighter. The Bloomberg Barclays US Aggregate corporate Avg. OAS is the tightest since 2018. Investment grade funds recorded $4.53 billion in inflows and high yield funds reported $1.3 billion in outflows. Municipals played catchup with Treasuries this week in the face of a steepening yield curve. Benchmark yields rose modestly on the week, the most meaningful move since April, moving ratios higher. Municipal funds saw their 15th consecutive week of inflows adding $2 billion for the week ended 2/17. Clarity surrounding the next round of stimulus should surface in the next two weeks as Washington votes on the $1.9 trillion package with $350 billion proposed for state and local governments.
Monday, February 22, 2021
•Germany Ifo Business Confidence
Thursday, February 25, 2021
•US Jobless Claims
•Eurozone M3 Money Supply
Friday, February 26, 2021
•US Core PCE
Sources: The WSJ, T. Rowe Price Global Markets Weekly Update, Trading Economics, Goldman Sachs Weekly Market Monitor
Data in this report is obtained from sources which we believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. It is provided for your information and guidance and is not intended as specific advice and doesn’t not constitute an offer to sell securities. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss. The Wilshire 5000 Total Market Index measures the performance of all U.S.-headquartered equity securities with readily available price data. The Standard & Poor’s 500 Index (S&P 500) is an unmanaged group of securities considered to be representative of the stock market. The Russell 2000 Index is a market-cap weighted index comprised of the smallest 2,000 companies within the Russell 3000 Index, a larger market-cap index made up of the largest 3,000 publicly traded companies in the U.S., nearly 98% of the investable U.S. stock market. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI Europe Index captures large- and mid-cap representation across 15 Developed Markets countries in Europe, covering approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe. The MSCI Emerging Markets (EM) Index captures large- and mid-cap representation across 26 Emerging Markets countries, covering approximately 85% of the free float-adjusted market capitalization in each country. The MSCI Japan Index captures large- and mid-cap representation of the Japanese market, covering approximately 85% of the free float-adjusted market capitalization in Japan. The Bloomberg Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index comprising Treasury securities, Government agency bonds, mortgage backed bonds, corporate bonds, and some foreign bonds traded in the U.S. The Bloomberg Barclays Global Aggregate Ex U.S. Index measures the performance of global investment grade fixed-rate debt markets that excludes USD-denominated securities. The Bloomberg Barclays Municipal Bond Index covers the U.S. dollar-denominated long-term tax-exempt bond market. Created by the Chicago Board Options Exchange (CBOE), the Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Data in this newsletter is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timelines or accuracy of this information. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss.