Highlights
• Rising bond yields continued to dominate headlines, with the 10-year Treasury yield surpassing 1.6% for the first time in a year before closing the week at 1.44%.
• February’s Consumer Confidence reading exceeded expectations (91.3), while sentiment surrounding job markets also improved.
• President Biden issued an executive order calling for a review of supply chains related to semiconductors, EV batteries and related rare-earth minerals to bolster U.S. procurement and production.
• The S&P 500 fell by 2.5% for the week, with growth stocks outperforming value for the first time in nine trading sessions. The rotation into value may have been temporarily stalled, due to potentially oversold conditions combined with decreasing yields. The consumer discretionary and technology sectors fell by nearly 5% and 4%, respectively, while utilities also fell by 5%. Energy was the lone weekly gainer, adding 4.3%, while financials and industrials lost the least.
Weekly Overview
• While volatility declined through most of February, the rapid run-up in yields caused the VIX to spike on Thursday, coinciding with a corresponding broad decline for equities. The tech-heavy Nasdaq took a particularly heavy hit, falling 3.5% on the day.
• The House of Representatives passed the $1.9 trillion coronavirus relief package on Friday. While the total dollar amount may ultimately be smaller, the bill should become law before unemployment benefits expire in mid-March. Eyes are now turning toward a possible infrastructure package that could be potentially funded through tax increases.
• Fed Chair Powell reinforced his commitment to a dovish approach to fiscal policy during his testimony last week. Investor sentiment and expectations for a rapid economic recovery appear to be behind the recent yield spikes, rather than an overheating economy. Yields remain near historic lows, giving the Fed some policy flexibility.
Market Drivers And Risks
• Coronavirus risks remain, but the news is trending positive. While variants pose a potentially significant risk, coronavirus metrics have improved. New cases, hospitalizations and deaths are down significantly as vaccination rates climb. The number of people with at least one dose is approaching 50 million, as 20 million doses of Johnson & Johnson’s vaccine are shipping following FDA approval. These trends are substantial reasons to be optimistic for a global recovery in 2021.
• Inflation risks are impacting sentiment. We have been anticipating a sentiment-driven equity pullback fueled by fears of inflation, as last week’s rapidly rising yields startled investors into believing a taper-tantrum could be imminent.
• The economy appears to be improving, rather than overheating, as reflected by rising commodity prices, cyclical outperformance, real inflation data, 2021 GDP growth expectations and the Fed’s commitment to accommodative policy until conditions normalize. Volatility spikes driven by inflation risks may create opportunities in quality companies poised to benefit from economic reopening, as well as in long-term growth companies whose valuations have fallen.
• To that end, stocks at the epicenter of the coronavirus continue to look attractive on a relative basis, as high-growth companies tend to lag in rising rate environments.
• As fundamentals and earnings continue to drive markets, we expect active managers may outperform, given their ability to generate alpha by reducing downside exposure and concentration risk through flexibility; remember, roughly half of the S&P 500 is currently tied to technology, consumer discretionary, and communication services—deemed to be the coronavirus “winners.”