Highlights
• Global flash manufacturing PMIs exhibited strength, with data from Japan, the EU and UK exceeding expectations.
• The 10-year Treasury yield increased nearly 15 basis points (bps), resulting in a steeper yield curve.

• Stimulus optimism remains positive, as the Biden administration extended foreclosure and forbearance programs.

Results were mixed across broad-based indexes, split between modest gains and losses for the holiday-shortened week of trading. Energy and financials each added 3.5% and 2.8%, respectively, while technology, health care and utilities lagged.

Weekly Overview
• Trading remained relatively subdued for a second consecutive week, as the S&P 500 failed to move more than 50 bps on a given day. Small caps trailed large caps for the first time in February, while value continued to outpace growth.

• Treasury Secretary Yellen continued to advocate for a $1.5 to $1.9 trillion stimulus package, stating the benefits of a larger package will far outweigh its costs and the Fed has the tools to fight inflation pressures.

• Once again, technology stocks received record inflows, despite relative underperformance that was partially attributed to rising rates. While financials continue to benefit, investors appear reluctant to move away from long-term outperforming areas of the markets.

Market Drivers And Risks
• Beware the bear steepening. 
As rising bond yields become a global phenomenon, we see a “bear steepening” dynamic in 10- and 2-year Treasury yield spreads, as yields and spreads are rising together. Over the past two market cycles, spread widening between 10- and 2-year Treasury yields of 130 to 200 bps from inversion lows has marked a peak for stocks.
• Although the spread is currently within 10 bps of this “bear steepening” range, we believe the strength and momentum of the broad economy will continue supporting equity markets, as well as limiting any possible market correction.

• Deep freeze. Severe weather in South Central U.S. is likely to have wide-reaching implications for the equity markets. Notably, 40% of the U.S.’s crude oil production was taken offline, while oil refining centers were also forced to cut output. In addition, 28% of Samsung’s global semiconductor production was halted, adding to the global chip shortage.
• Rising oil prices have fueled existing inflation fears, while transitory dislocations like the rapid appreciation driven by last week’s weather conditions will likely add to volatility and make inflation data appear even more exaggerated. The Fed will likely continue to look-past these short-term variances toward normalized conditions.

• Betting on Bitcoin. Bitcoin is currently the second-most-popular trade after long-technology positions. The cryptocurrency topped $50,000 last week, due to news of Tesla’s investment and interest from Morgan Stanley.
• While there are valid reasons to own Bitcoin (i.e., concerns over inflation or government debt levels), we believe cryptocurrencies should be a purely discretionary part of overall portfolio allocation, given their speculative nature, lack of central authority and limited supply.

Risks To Our Outlook
Disorderly yield growth and inflation risks remain our biggest near-term concerns, as any indication of an impending tapering of quantitative easing may cause investors to overreact, resulting in a possible correction.

Coronavirus variants remain at the forefront of possible risks, given their propensity to spread more quickly, the possibility to be more deadly and the potential to disrupt economic reopenings. Additionally, stimulus-driven volatility is likely to persist until a package has been passed.

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