403(b) Curriculum Library

Market Moves: February 22, 2021

The U.S. equity markets delivered mixed results last week, with the Dow Jones Index posting a slight gain of 0.2% and the S&P 500 and NASDAQ posting losses of 0.7% and 1.5%, respectively. While stimulus hopes and growth optimism have dominated price action in recent weeks, the focus of the market has now shifted to a continued climb in Treasury yields. Here are some other insights on the markets and the economy this past week:

Stock prices appear to be entering a consolidation phase, with price action fairly muted during the week. The S&P 500 Index and tech-heavy NASDAQ delivered modest losses this holiday-shortened trading week, down 0.7% and 1.6% respectively, and the Dow Jones Index was largely unchanged. The cyclical sectors of the market continued to advance on growth optimism and Treasury Secretary Yellen’s calls to “go big” on fiscal stimulus. The energy and financial sectors posted the largest gains, while the utilities and health care sectors lagged.

Longer maturity U.S. Treasury yields continue to march higher, with the 10-year rate rising to 1.34% and the 30-year rate climbing to 2.13% at the end of the week. Interest rates are not only climbing in the U.S.; bond yields are also rising across the globe as the market is starting to factor in improving growth prospects in 2021. With the move in the Treasury market gathering momentum, all eyes are on what higher yields might mean for the stock market, particularly high growth sectors like technology.

Despite the recent back up in interest rates, junk bond yields continue to hover near record lows. While investors still receive some additional compensation for taking on credit risk, the average yield on speculative grade credits is near its lowest point in history, hovering just above 4.0%. This is lower than the 5.0% yield on the ICE BofA U.S. High Yield Index just prior to the pandemic, and substantially below the 11.0% yields offered during the height of the market dislocations last March. The low level of absolute yields has been driven by the strong stock market recovery, improved corporate earnings outlook, and lower than expected default rates. Strong investor demand in a yield-starved world has also helped.

The minutes from the Federal Reserve’s January meeting revealed that policymakers expect to keep interest rates pegged near zero as the economy continues to recover from the pandemic. Fed officials still see the economy a long way from achieving their longer-term goals of full employment and 2% inflation. While the bond market has been selling off in anticipation of an improving economic outlook, Chairman Powell did not provide any hints on when the Fed might start tapering its pace of bond buying. More notable was the shift in the Fed’s language regarding record high asset valuations and vulnerabilities due to increased leverage in the system.

The latest retail sales report was surprisingly strong, rising 5.3% in January. The unexpected surge suggests that consumers wasted no time in spending their recent stimulus checks, with gains recorded in every major category of spending. Electronics and appliances saw the sharpest uptick, rising 14.7% during the month. Food services and drinking establishments, which have suffered the most during the pandemic, also saw a monthly increase of 6.9%.

The widely watched jobless claims data, which is a proxy for layoffs, suggests that the labor market recovery continues to struggle amid the pandemic. This week’s report revealed that 861,000 Americans filed for first-time unemployment benefits, significantly worse than expectations. Another 516,000 Americans applied for the federal government’s Pandemic Unemployment Assistance. With nearly 1.4 million claiming unemployment benefits, calls for more fiscal stimulus will likely start heating up again.

Inflation pressures are starting to percolate. The Producer Price Index, which tracks changes in the costs of production, just registered its largest monthly increase since the Index began in 2009, rising 1.3% in January. This is not surprising, given the upward pressure on material costs and reports of widespread supply chain delays. While there have been some anecdotal reports that producers have been able to pass through the higher costs to consumers, the price increases do not appear to be widespread enough to significantly impact consumer price inflation.

The string of positive economic surprises continues in the U.S., with the latest Purchasing Managers Index (PMI) rising to a six-year high in February. Service sector growth advanced companies benefited from partially eased virus-related restrictions. Manufacturing output growth continues to hover near its highest level in a decade. Businesses also reported steep increases in their input costs. Of note, many businesses signaled they were able to pass-through some of the higher costs to consumers as demand continues to outstrip supply.

Indices: Core Bond: Bloomberg Barclays U.S. Aggregate Index, High Yield: ICE BofA US High Yield, Large Value: Russell 1000 Value Index, Large Blend: S&P 500 Index, Large Growth: Russell 1000 Growth, Emerging Markets, MSCI EM NR USD, Foreign Equities: MSCI ACWI Ex USA NR USD, REITs: FTSE NAREIT All Equity, Small Blend: Russell 2000

Should you have additional questions, please contact your Cammack Retirement Group consultant or info@cammackretirement.com. Note that this article was published on February 22, 2021. Data represented is as of the publication date. The information contained herein has been obtained from sources that are believed to be reliable. However, Cammack Retirement Group does not independently verify the accuracy of this information.

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.

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