Economic Data Watch and Market Outlook
Last week marked the one-year anniversary of two divergent trends that began on March 23, 2020, between the equity and fixed income markets. Equities have enjoyed a 12-month bull run that has seen historic performance from the major stock indexes. The S&P 500 is up 76% over the year, and only twice in history has the benchmark index posted a similar 12-month surge (in 1936 up 80% and 1933 up 75%). The other equity indexes have also seen strong rises, with the DJIA up 76.7% and the Russell 2000 higher by 121.1%, while commodities have advanced with WTI Crude up 160.9% and COMEX Gold higher by 9.3%. The parallax view of the bond market, has us bidding farewell to its bull run that began in 1981 and ushering in a bear market, as the BloombergBarclays US Long Term Treasury TR Index (maturities 10 years +) is 20% lower than its March 2020 peak. These divergent trends should continue over the next 12 months, as equities will have a torrent of tailwinds including massively accommodative fiscal and monetary policy, historic levels of cash, and rapidly accelerating economic and corporate earnings growth. Conversely, bonds are confronted with the reality of rising rates, prompted by the mounds of debt being issued by central banks, the measured rise in inflation, and the inevitable reversal of monetary policy that will include a rise in short rates and the long-feared move towards “tapering”.
Heading into next week’s holiday shortened trading sessions, asset prices will be subject to a tug of war between vaccine and geo-political issues versus fundamental factors. The Euro-zone and the US saw a recent spike in COVID-19 cases, with a “third wave” deluging Europe. A weekly rise in new cases of 13% in the UK (D117 variant), 27% in France and 67% in Germany have led to new mini-lockdowns. The sober tone has been exacerbated by the slow rollout of the Astra Zeneca vaccine, which have led economists to fear a deeper than expected recession in Europe for Q1. Asian markets have been negatively impacted by the confrontational tone seen during the recent US/China talks, the SEC’s call for accountability of non-US companies listed on US exchanges to provide verifiable audit reports, and China’s recent crackdown on Chinese mega companies for monopolistic practices. On the plus side, the US with its $1.9 trillion stimulus injection, prospects for a potential $3 trillion infrastructure spend, and increased projection for the number of vaccine doses deployed from 100 to 200 million has provided hope the US will see a sharp increase in growth that will boost global growth in turn.
In looking ahead to the economic calendar next week, a busy schedule will be highlighted by housing, consumer, and employment data releases. We start off on Tuesday with the March report for the Conference Board Consumer Confidence Index, which is expected to improve by 6.7 points to 98.0. Consumer confidence has risen due to vaccine distribution and the recent round of stimulus checks.
On Wednesday, Pending Home Sales in February are projected to have declined by 7.0%. due primarily to the severe winter weather seen during the month. Later in the morning, the ISM Manufacturing Survey is estimated to have risen 0.7 points to 61.5 in March.
The Non-Farm Payroll report on Friday is expected to show a strong increase of 650,000 for March, following the 379,000 jump in February. The improvement is due to a combination of fiscal stimulus, warmer weather and improving outlook for COVID-19 related conditions. The UE rate is forecast to drop by 0.2% to 6.0%.
The Week In Review
U.S. Equities
US equity markets mostly rallied last week as weekly Jobless Claims hit their lowest level since the start of the pandemic, and the Fed lifted restrictions to enable banks to increase their dividends and buy back stock.
US Index Performance
- Dow Jones +1.36% MTD +7.06% YTD +8.58%
- S&P 500 +1.58% MTD +4.40% YTD +6.20%
- Russell 2000 -2.88% MTD +1.01% YTD +12.71%
- NASDAQ -0.58% MTD -0.35% YTD +1.94
Drivers: I) The Federal Reserve stated temporary restrictions imposed last summer on bank dividends and share repurchases would cease for most banks on June 30, depending upon the outcome of each bank’s annual stress test results. The restrictions were implemented as the US economy was in free fall, and the Fed wanted banks to conserve their capital in case the economic damage caused by the coronavirus pandemic worsened.
II) February New Single Family Home sales plunged by 18.2% to 775,000 units on a seasonally adjusted annual basis. The decline though larger than expected, was countered by upward revisions to the sales data for November, December, and January. The decline was mostly likely caused by February’s inclement winter weather, as well as the increased in 30-year mortgage rates above 3.0% for the first time since last July.
III) The expected dramatic moves in February’s PCE report did not disappoint, as Nominal Income dropped by 7.1% after rising by 10.1% in January. Much of the heightened volatility can be blamed on the rise in income associated with stimulus checks paid out in January. The rapid change in income also caused a severe swing in the savings rate, which bounced by 6.3% in January and subsequently fell by 6.2% in February.
IV) Consumer Spending in February dropped by 1.2% after seeing a 3.0% increase in January. Despite the February setback, another round of stimulus checks and improving mobility with increased vaccine distribution, should see real consumption soar in Q1 by an estimated 9.0% saar according to JPMorgan. The PCE Price Index for February rose by 0.23% (6% on an annual basis), which is still below the Fed’s 2.0% annual inflation target.
V) Equities Month to Date are higher with Large-Cap, Value, Utilities, and Con. Staples leading equity price performance. The laggards for the period are Small-Cap, Growth, Technology, and Comm. Services
Capitalization: Large Caps +3.78% (YTD +5.91%), Mid-Caps +2.95% (YTD +8.40%) and Small Caps +1.01% (YTD +12.71%). Style: Value +7.57% (YTD +21.43%) and Growth +2.23% (YTD +9.93%). Sector Groups: Energy +5.89% (YTD +34.55%), Financials +6.94% (YTD +17.19%), Industrials +8.79% (YTD +11.26%), Materials +8.76% (YTD +10.50%), REITs +7.89% (YTD +10.12%), Communication Services +0.14% (YTD +7.07%), Healthcare +4.26% (YTD +3.49%), Consumer Discretionary +3.09% (YTD +3.43%), Information Technology +1.63% (YTD +2.28%), Consumer Staples +8.85% (YTD +2.12%), Technology +1.65% (YTD +2.10%) and Utilities +9.57% (YTD +1.94%)
European Equities
The MSCI Europe Index was flat last week as the Ifo Institutes German Business Sentiment reached its highest level since 2019, despite a third wave of the COVID-19 virus and slow vaccine rollout.
Drivers: I) The Euro-Zone Composite Output PMI index increased 3.7 points to 52.5 in March, which was a sizable upside surprise versus the expected 0.8-point decline. The strong reading came despite a tightening and eventual easing of restrictions during the reporting period, which caused a decline in mobility. The Indexes’ improvement came from strong foreign and domestic demand in manufacturing.
II) In Germany, the IFO Business Climate Index jumped by 3.9 points to 96.6, boosted by the increase of 5.4 points in business expectations to 100.4- and 2.4-point rise in current conditions to 93.0. The improvements were seen across most major sectors, with the manufacturing sectors seeing the best gains from wholesale, retail, and construction, while the services sectors also improved.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -0.03% for the week (MTD +2.84% YTD +3.83%).
Asian Equities
Asian markets were mixed as positive news in the US regarding fiscal stimulus and the expanding rollout of the COVID-19 vaccine, should boost US as well as global economic growth. The DJ Asia Index was lower by -2.28% for the week, (MTD -0.08% YTD +5.64%).
Drivers: I) In Japan, the March reading of the flash Composite PMI showed a small rise of 0.1 points to 48.3, which brought the Q1 average to just 0.3 points below the Q4 2020 average. The economy has been resilient, despite the state of emergency that has been in place for two months, before being lifted on March 21. The PMI rise in Q1 2021 is a sharp contrast to the steep decline of 13 points seen in Q2 2020.
II) In Taiwan, Q1 2021 saw export activity remain strong as orders jumped by 48.5% on an annual basis (8.5% month over month), which follows the sharp increased of 48.5% in January. Exports were boosted by strong tech sector demand, as orders soared by 6.6% month over month. The tech demand has been related to 5G communication, home personal computers, and autos demand.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -2.06% (MTD +0.73% YTD +6.37%), the Hang Seng Index was lower by -2.28% (MTD -2.38% YTD +3.84%) and the Shanghai Composite advanced by +0.40% (MTD -2.59% YTD -1.58%).
Fixed Income
Treasury yields took a breather last week from its seemingly inexorable rise since the beginning of the year, as declines in personal income and spending temporarily put a damper on inflation concerns that have been prompted by the recently passed $1.9 trillion stimulus package.
Performance: I) The 10-year Treasury yield fell last week ending at 1.679% down from 1.726%. The 30-year yield declined last week finishing at 2.382% falling from 2.438%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.35% last week, MTD -1.15% and YTD -3.28%. The Bloomberg Barclays US MBS TR was higher by +0.16% last week, MTD -0.47% and YTD -1.06%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.63% for the week, MTD -0.12% and YTD +0.58%.
Commodities
The DJ Commodity Index fell last week by -0.50% and is lower month to date -0.98% (YTD +10.34%). Commodity prices were lower on the week, as the specter of a double dip recession in the Euro-zone due to a third wave of the COVID-19 virus weighted on the energy and industrial metals sectors.
Performance: I) The price of oil fell last week by -0.98% to close at $60.84 and is lower month to date by -1.32% (YTD +25.39%). Oil dropped despite an estimated 2 million barrels of oil being pulled off the market per day due to Suez Canal being blocked by a 220-ton cargo ship, as the sharp rise in new COVID-19 cases in the Euro-zone could lead to a decline in growth and demand for oil.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.83% closing at 92.73 for the week (MTD +1.98% YTD +3.11%). The USD was higher on the week, as investors are seeing upgrades to US GDP and corporate earnings growth rates for 2021.
III) The price of gold posted its first decline in three week, as improving US economic prospects pushed up the USD which is negative for the precious metal. Gold fell in price by -0.66% last week, dropping to $1731.3 (MTD -0.09% YTD -8.64%).
Hedge Funds
Hedge fund returns in March are primarily negative for the month with the core strategies Event Driven, Macro/CTA , Relative Value and Multi-Strategy lower, while Equity Hedge is higher.
Performance:
- The HFRX Global Hedge Fund Index is lower by -0.50% MTD (+0.84% YTD).
- Equity Hedge advanced by +0.06% MTD (+1.83% YTD).
- Event Driven is down MTD -0.24% (+1.71% YTD).
- Macro/CTA has declined by -1.26% MTD (-0.57% YTD).
- Relative Value Arbitrage is down by -0.87% (-0.15% YTD).
- Multi-Strategy is lower MTD by -0.88% (-0.32% YTD)
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet
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