Conway’s QuickTake: Week of March 8, 2021

Here’s What Happened Last Week: 

U.S. Equities
Benchmarks were mixed last week as investment styles and market caps were impacted differently by rising longer-term interest rates. Growth stocks suffered the largest decline, and the Nasdaq finished the week off 2% while many value benchmarks were positive. Small-caps outperformed within the value segment but lagged in the growth segment. Within the S&P 500 Index, more cyclical portions of the market, such as energy and financials were once again the top performers. Tech stocks fell dragging down the IT and consumer discretionary sectors. Equity markets appear divided about whether the rise in bond yields is based on a healthy increase in growth expectations, concerning inflation pressures, or a mixture of both. Year-to-date, value and small-cap stocks have secured a significant lead over growth and large-cap stocks, respectively. 

The Senate passed the $1.9 trillion pandemic relief package providing additional jobless benefits and direct payments to U.S. citizens. It will now return to the House for approval before being sent to President Biden. Critics of the bill believe that it offers the potential of overheating a healing economy and further igniting inflation pressures. These concerns are reinforced by rising yields, commodity, and input prices. Fed Chair Powell’s comments last week appeared to disappoint markets as he offered no new commitments of continued asset purchases or other action. His current contentment with the level of monetary policy contributed to a sizeable sell-off in equity and bond markets late last Thursday.  February’s job report meaningfully surprised to the upside, with nonfarm payrolls rising by 379,000 or about twice consensus estimates. Most of the gains came out of the hardest hit sectors within leisure and hospitality.  Rising payrolls contributed to a fall in the unemployment rate to 6.2%, the lowest level so far with the pandemic.

Source: iStock 2021
International Equities
Both developed international and emerging market equities lagged large-cap domestic stocks last week in USD terms. European stocks ended the week little changed in USD terms. Optimism around the lifting of select coronavirus restrictions was offset by concerns over the potential for higher rates and inflation.  Japanese markets increased in local terms but were close to flat when converted to USD as the yen fell. Chinese equities fell against rising global yields and inflation expectations. Chinese tech shares, especially high-flying internet and electric car stocks, declined meaningfully in-line with trends in domestic markets. 

Many European nations are setting the stage for lifted pandemic focused restrictions, although the response is mixed depending upon the country and region. Rising inflation expectations could result in reduced monetary and fiscal measures within the Eurozone. The potential for a more hawkish stance pushed European bond yields higher. The EU accused the UK of breaking part of the terms of the Brexit deal after Britain extended grace periods for border checks on food imports to Northern Ireland. The BoJ maintained its stance of tight control over the yield curve where it caps the 10-year Japanese Government Bond yield around 0% and allows the benchmark yield to move around the target. The assertion caused long-term yields to fall in response. China’s regulators have made hawkish signals stressing the need for deleveraging and avoiding financial bubbles. The yield on China’s 10-year bond rose to 3.36% at weekend. 

Credit Markets
The dramatic bond sell-off continued last week as yields out the front end of the U.S. Treasury curve continued to climb. On Friday, the 10-year note hovered around 1.56%, with the week’s range-topping yearly highs of 1.61%. Repo for the 10-year remained noteworthy dropping below -3%. Thursday’s remarks by Fed Chairman Powell reinforced the Fed’s current dovish outlook, signaling no changes to the current monetary policy despite the expectations for rising inflation and economic recovery. The corporate spread week-to-date for the USD Investment Grade All Sector OAS was little changed (+0.01%). Investment grade funds recorded $5.2 billion in inflows and high yield funds reported $601.4 million in inflows. Municipals detached from Treasuries with yields 0.02% to 0.06% lower on the week, steepening the curve as demand was stronger inside of 7 years. With the sharp move in the Treasury curve, municipals richened on a relative value basis with ratios lower on the week. Ratios remain on the lower end of long-term averages. Municipal funds saw their first outflow in 4 months with $605 million exiting as investors weigh the continued rise in interest rates and some tax bill selling being contributing factors.

Looking ahead…
Tuesday, March 9, 2021
     •China Consumer Price Index YoY
Wednesday, March 10, 2021
     •US Consumer Price Index YoY
     •US Core CPI YoY
Thursday, March 11, 2021
     •US Jobless Claims
     •European Central Bank Refi. Rate Decision
Friday, March 12, 2021
     •University of Michigan Consumer Sentiment Survey
     •Euro area Industrial Production  

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.