Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services
Market Performance Snapshot (Week ending March 26, 2021 and Year-to-Date)
- Dow Jones Industrial Average®: +1.4% | +8.1%
- S&P 500® Index: +1.6% | +5.8%
- NASDAQ Composite® Index: -0.6% | +1.9%
- Russell 2000® Index: -2.9% | +12.5%
- 10-year U.S. Treasury note yield: 1.67%
- Down 6 basis points from 1.73% on March 19, 2021
- Up 75 basis points from 0.92% on December 31, 2020
- Best-performing S&P 500 sector this week: Real Estate, +4.3%
- Weakest-performing S&P 500 sector this week: Communication Services, -1.8%
Past performance is not a guarantee of future results.
One year from the last market bottom, equities are in a new phase
The S&P 500 closed Friday at a record high, while the Russell 2000 and NASDAQ Composite retreated for the week, as investors continued to digest a combination of mixed economic data, volatile Treasury yields, and policy discussions for insights about the future direction of the market. The 10-year Treasury yield fell from its recent highs.
- March 23 marked one year from the equity market’s bottom. Over the course of that year, the growth in equities was extraordinary, with the broad-market S&P 500 up 76%, the technology-heavy NASDAQ Composite up 95%, and the small-cap Russell 2000 up more than 115%.
- Leadership among sectors shifted over the course of the year. Technology stocks – and work-from-home/live-at-home stocks in particular – surged through 2020. Yet the end of 2020 and beginning of 2021 have brought a rotation toward industrials, energy, financials, and other stocks that stand to benefit from economic reopening and recovery. Remarkably, all 12 S&P sectors were up at least 35% in the 12 months following March 23, 2020, with the energy and materials sectors up more than 100%.
- The market is assessing its future direction. The relatively easy gains of post-March 2020, which drew many retail investors into the market, have leveled off. Economic data is pointing toward recovery, but still tentative. Corporate earnings have been strong, but against the backdrop of lowered expectations – it remains to be seen which companies will perform well in the next economic phase.
- Washington policy continues to be a major driver of economic growth and market expectations. Congress has approved more than $5 trillion in fiscal stimulus since last March, equal to about 25% of annual GDP. At the same time, the Federal Reserve has pledged to provide monetary stimulus for as long as it takes the economy – and particularly the labor market – to fully recover.
- One question on the mind of market participants: When will the fiscal and monetary stimulus ebb, and will the economy and markets be strong enough to withstand the removal of support when it happens?
- Fed Chair Jerome Powell and Treasury Secretary Janet Yellen testified before Congress and reiterated their view that the most recent stimulus package will probably cause prices to rise in the spring, but that price inflation will be temporary and not enough to prompt the Fed to withdraw monetary stimulus.
- In an interview with NPR, Powell sought to reassure markets that no sudden monetary moves are on the horizon: “We will very gradually over time and with great transparency, when the economy has all but fully recovered …be pulling back the support that we provided during emergency times.”
Positive data suggest the U.S. economy is headed in the right direction
Economic data released during the week continued to show that the U.S. economy is healing, but is not yet out of the woods. Investors should also keep an eye on Europe’s challenges, which could impact economic growth worldwide.
- For the first time in a year, weekly new unemployment claims fell below the 700,000 mark, to 684,000. If progress on vaccines continues, and more states and municipalities are able to ease economic restrictions, this number should continue to decline.
- The latest reading on 4Q 2020 GDP came in at 4.3%, slightly higher than the initially reported 4.1%. The Federal Reserve and many private economists now expect U.S. GDP to grow by around 6.5% in 2021.
- Orders for durable goods – manufactured products expected to last at least three years – slipped by 1.1% in February. This was largely the result of winter weather and supply-chain challenges that continue to make it difficult to move goods around the world as consumer demand accelerates. The recent blockage in the Suez Canal caused by a single stuck ship highlights how fragile global supply chains can be.
- Intel announced that it will build two new facilities in Arizona to manufacture semiconductor chips. The move aligns with a broader effort, supported by both the Trump and Biden Administrations, to increase the resilience of U.S. supply chains for critical products and technologies.
- As the U.S. continues to expand vaccine access, European governments are having a more difficult time getting vaccines distributed. Several countries are dealing with what German Chancellor Angela Merkel referred to as a “third wave” of coronavirus infections. Parts of the continent are in various levels of lockdown, which complicates efforts to put economies back on firm footing and could be a drag on otherwise positive global growth forecasts for this year.
Final thoughts for investors
The past year delivered a stunning recovery in equities following the March 23, 2020 low. We’ve also seen significant volatility in bond yields, and a substantial rotation among equity sectors, as the economy has transitioned from deep recession to tentative expansion on the back of massive government stimulus. The course of the economic recovery is still uncertain and highly dependent on the virus and vaccines in the U.S. and abroad. Speak with a financial professional about positioning your portfolio for a variety of potential economic and market paths.