Highlights
• Treasury yields fell last week, settling at 1.67% following a week of mixed global data.
• March’s Flash Manufacturing (59.0) and Services (60.0) Purchasing Manager’ Indexes fell just short of expectations, but were still strong on an absolute basis.
• Despite many fears to the contrary, so far inflation appears to remain in check. Core PCE inflation has been decelerating. And we saw sharp drops in personal income and spending in February, although we expect that will reverse in March as individuals start spending stimulus checks.
Global equities were mixed last week, with U.S. markets faring better than their non-U.S. counterparts. Large-caps outperformed small caps, while growth underperformed value. From a sector perspective, all but three returned 2% or more for the week led by real estate and consumer staples led, which added 4.3% and 4.0% respectively. The laggards were communications services (-1.9%) and consumer discretionary (-0.2%), the only sectors to contract last week, while financials added 1%.
Weekly Overview
• While vaccine availability is increasing, new case counts have been rising in certain areas. We are particularly concerned about news that Germany, France, the UK, India and Brazil have imposed new lockdowns.
• The financials sector received a boost last week following a Fed announcement that should allow banks that have passed the current round of stress tests to resume dividend distributions and share buybacks.
• Global supply chains have been strained further following the blockage of the Suez Canal by a massive container ship. The worst disruption since 2004, the blockage is costing the global economy an estimated $400 million each hour.
Market Drivers And Risks
• Market leadership oscillates. There were no consistent outperformers for the week by style, market cap or sector, as we have become accustomed to in the Covid-era.
• Trading favored large caps, growth and technology to start the week, as the 10-year Treasury yield stabilized and cyclical areas pulled back on unfavorable virus news. This trend reversed mid-week as the Suez blockage, Fed decision on banks and economic data provided tailwinds for cyclicals and value. We believe this type of market activity is likely to continue for several months as volatility increases.
• Infrastructure spending. The Biden administration is turning its sights on a trillion dollar infrastructure package (and how it will be funded). We see several economic and market implications.
• Should it come to fruition, an infrastructure package would likely help boost U.S. manufacturing and blue-collar job creation. This would likely favor cyclical sectors such as materials and industrials where government spending is likely to be concentrated. The president may attempt to fund this spending via increased tax rates on corporations and top-earning individuals, which would likely create pockets of volatility as investors recalibrate expectations for growth and valuations and could also lead to earnings growth headwinds.
• Revisiting trade. In addition to infrastructure and tax reform, the administration has also turned its focus to global trade. Starting with an executive order aimed at strengthening and securing American supply chains, the administration is looking to review existing trade policies, which included a meeting between trade envoys from the U.S. and China in Alaska.
• Expectations for U.S./China relations remain low as both countries continue to jockey for global leadership. Tensions are likely to remain elevated, especially as more American companies vocalize opposition to Chinese policies. Additionally, the notion of “on-shoring” large swaths of the global supply chain is unlikely, given cost and diversification risks. As a result, we anticipate increased global investment in strengthening existing supply chains.