Highlights
• Bond yield volatility continued to moderate, as the 10-year Treasury yield settled at 1.67%.
• March’s ISM Services Index rose for the tenth consecutive month to a record high 63.7, reflecting strength in most Covid-sensitive industries.
• Initial jobless claims rose for a second week to 744,000, while continuing claims fell to 3.8 million with variance across regions.
• Underwhelming economic data and dovish Fed minutes led to a weakening of the U.S. dollar.
Most global equity markets rose last week as economic data was generally neutral-to-positive. In the U.S., the S&P 500, DJIA and NASDAQ each added 2% or more during a week of relatively light trading volumes ahead of a highly anticipated earnings season. Elsewhere, the MSCI ACWI ex USA and the MSCI EAFE each added over 1%, while their emerging market counterpart lost 0.6% as two of its largest constituents (China and India) were in negative territory.
Weekly Overview
• Growth, technology and momentum stocks continued their recent outperformance as rates remained stable, while large caps outperformed small caps.
• Information technology (4.7%), consumer discretionary, (4.2%) and communication services (3.4%) led, as real estate (0.6%) and materials (0.7%) were relative laggards. Energy (-4%) was the lone sector in negative territory.
• Global supply chain disruptions (chiefly in the semiconductor space) remain in the headlines as companies have hinted about potential earnings headwinds: Apple may delay some hardware production, GM is shuttering several factories and both Uber and Lyft are ramping up incentives to entice drivers.
Market Drivers And Risks
• Inflation risks, realized. As we expected, last week’s PPI increases in the U.S. and China grew sharply year-over-year, reflecting increases in energy prices, supply chain disruptions and comparisons of the one-year anniversary of economic shutdowns.
• While inflation could spike to over 3% during the next few months, our full-year expectations are closer to 2% as we move from “very low” to “normal” economic activity. As markets digest extraordinary economic growth, rather than grapple with day-to-day or week-to-week rotations, we see opportunities this year in a combination of high-quality cyclicals that could benefit from continued economic improvement and high-quality secular growth companies tied to the digital economy.
• Markets mull minutes. Details from the Federal Reserve’s March meeting reaffirmed the Fed’s commitment to accommodative policy, while indicating that the central bank remains mindful of transitory spikes in rates and inflation.
• The overall dovish tone was well received, as the S&P 500 Index closed at a record high on Wednesday. There have been concerns as to whether or not the Fed will stay committed to its stated policy in the face of rapidly rising rates and inflationary pressures, but we are confident that it will allow transient shocks to pass without taking action. Indications will come long before any actual policy changes, which could happen toward the end of 2022.
• “Hidden” employment data. The strong March jobs report underpinned the hypothesis that the economy’s recovery is well underway. Increasing vaccination rates and warmer temperatures will likely lead to similar results in the coming months, and we need to look beyond headline employment numbers to better anticipate possible Fed policy changes.
•According to the Bureau of Labor Statistics, both the number of unemployed persons and the labor force participation rate remain in worse shape than their pre-Covid marks (8 million and nearly 2%, respectively). While temporary layoffs continue to dwindle, the number of workers losing jobs due to business closures will be a key metric. These non-headline statistics, among others, will help guide central bank strategy.