Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services
Market Performance Snapshot (Week ending March 12, 2021 and Year-to-Date)
- Dow Jones Industrial Average®: +4.1% | +7.1%
- S&P 500® Index: +2.6% | +5.0%
- NASDAQ Composite® Index: +3.1% | +3.3%
- Russell 2000® Index: +7.3% | +19.1%
- 10-year U.S. Treasury note yield: 1.63%
- Up 7 basis points from 1.56% on March 5, 2021
- Up 71 basis points from 0.92% on December 31, 2020
- Best-performing S&P 500 sector this week: Consumer Discretionary, +5.7%
- Weakest-performing S&P 500 sector this week: Communication Services, +0.7%
Past performance is not a guarantee of future results.
One year into the pandemic, equities rise on new fiscal stimulus
As the world marked the one-year anniversary of COVID-19 being declared a pandemic, U.S. equity markets rose, supported by fiscal stimulus and tempered inflation fears. The 10-year Treasury yield bounced up and down, crossing 1.6% early in the week, falling back to around 1.5%, and then climbing as high as 1.64%—its highest level since February 2020 —on Friday.
- The tech-heavy NASDAQ Composite Index, which includes many companies whose valuations are sensitive to interest rate changes, largely followed the movement in the 10-year yield. The index dipped into correction territory (a decline of at least 10% from the most recent high) on Monday. It then rose through the middle of the week, as the 10-year rate leveled off and economic data indicated that inflation is still well within the Federal Reserve’s target range. On Friday, the NASDAQ Composite declined again, as Treasury yields marched upward. The index still managed a gain for the week.
- The Dow Jones Industrial Average, S&P 500, and Russell 2000, all of which are more sensitive to broader economic conditions, hit new highs during the week, as President Biden signed the $1.9 trillion stimulus bill that will put hundreds of billions of dollars into consumers’ pockets.
- Passage of the stimulus package, along with accelerating vaccine distribution, prompted economic forecasters to raise their projections for U.S. economic growth this year. Both Goldman Sachs and Morgan Stanley now anticipate U.S. GDP to grow around 8%. The OECD, which tracks economic data in the world’s major economies, more than doubled its forecast for 2021 U.S. GDP growth to 6.5%.
- To be sure, the U.S. economy, particularly the labor market, is still far from fully healed. New unemployment claims topped 700,000 for the 51st consecutive week. The figure was averaging around 220,000 prior to the pandemic.
- Recently, markets seem more concerned about the economy overheating than underperforming, stoking fears that rapid economic growth could push inflation and interest rates higher. This concern is likely to continue for some time, as markets try to determine whether the Federal Reserve will be forced to act sooner than planned to rein in inflation.
- Consumer prices are likely to rise through the spring, as a result of businesses reopening and consumers spending, as well as data quirks. Last spring’s consumer spending figures were exceptionally low as the pandemic took hold and the economy experienced disinflation, so this spring’s figures will likely be higher than if 2020 had been a normal year.
- Federal Reserve officials have consistently stated that a reversal of disinflation isn’t the same as structurally higher inflation. They are less concerned about transitory inflation related to near-term economic recovery and data eccentricities than about the potential longer-term damage that could occur from stunting the labor market recovery.
- The Federal Reserve policy-making board meets March 16-17 and will issue a statement following the meeting.
International economies grapple with differing growth expectations
As economic growth expectations accelerate in the U.S., the international picture is more mixed. In Europe, the slow pace of vaccine distribution outside the UK is raising concerns about the continent’s growth path. In China, leaders seem to be prioritizing economic stability over faster growth.
- The European Central Bank announced it will increase the pace of its bond purchases over the next few months to stem rising interest rates. The European Union has had a harder time emerging economically from the pandemic, as slow vaccine rollouts and ongoing virus waves have led to stiffer restrictions on economic activity. The OECD expects the Eurozone economy to grow 3.9% this year.
- EU officials approved the one-dose Johnson & Johnson vaccine, which should help accelerate the vaccine rollout.
- The UK, which has had a faster and smoother vaccine rollout than its EU neighbors, outlined a plan to raise corporate taxes starting in 2023 to help pay for pandemic-related spending. This may be an early indicator of the policy choices other governments will face as debt associated with fiscal stimulus accumulates in all major economies.
- China established an economic growth target of 6% at the annual meeting of its National People’s Congress. While 6% is high by global standards, it is lower than recent Chinese growth trends. The OECD forecasts Chinese growth of 7.8% this year.
- China was the first economy to return to growth after experiencing a pandemic downturn. Now, Chinese leaders appear to be stressing stable growth over fast growth, as state regulators have recently warned about asset bubbles in the economy. They are also seeking to exert greater control over home-grown technology and financial companies, such as Alibaba and its Ant Financial subsidiary.
- Investors should continue to watch China, which is the world’s second-largest economy behind the U.S. Economic policies there have direct and indirect repercussions for markets around the world. Most emerging-market ETFs and mutual funds are heavily weighted toward China, and the CSI 300 Index – a Chinese stock index roughly equivalent to the S&P 500 – has experienced a correction over the past month similar to that recently experienced by the NASDAQ Composite.
Final thoughts for investors
With $2.8 trillion in fiscal stimulus ($900 billion in December and $1.9 trillion this month) now making its way into the U.S. economy, markets are expecting accelerating U.S. growth, as evidenced by the continuing rotation toward cyclical stocks. But potential risks remain, whether from higher inflation and interest rates, rising debt levels that will require future policy changes, or a stubborn virus that prompts lingering economic restrictions. Speak with a financial professional about maintaining the appropriate risk profile for the road ahead.