In this month’s recap: The burgeoning economic recovery and decreasing number of COVID-19 infections lifted stocks.
Monthly Economic Update
Monthly Economic Update | Presented by Sterling Total Wealth Solutions | March 2021
Stocks notched a solid gain in February thanks to growing optimism surrounding the economic recovery and decreasing number of COVID-19 infections.
The Dow Jones Industrial Average led, picking up 3.17 percent. The Standard & Poor’s 500 Index rose 2.61 percent, while the Nasdaq Composite added 0.93 percent.1
Investors focused on fundamentals during the month as the U.S. presidential election and a social media trading frenzy moved to the background.
Attention was centered on three key inputs: corporate earnings, economic data, and interest rates—all three of which influence longer-term stock valuations.
With the fourth quarter earnings season coming to a close, many companies surprised analysts.
Of the 83 percent of S&P 500 companies that delivered reports, 79 percent of those reported results that exceeded Wall Street expectations. Upon closer evaluation the companies, on average, reported earnings that are 14.6 percent above estimates, which are substantially above the 6.3 percent five-year average.2
Communication Services and Information Technology were the sectors that lead the reporting of positive earnings surprises. Real Estate, Energy, and Utilities lagged in beating earnings estimates.3
Economic strength was evident in January’s retail sales, industrial production, and durable goods orders. However, the labor market remained stubbornly weak. The economic recovery narrative was buoyed by falling COVID-19 numbers, as well as improvements in vaccine distribution.
Treasury yields rose last month, with 10-year yields closing February at 1.46 percent and 30-year yields at 2.11 percent. Bond yields may increase for several reasons, some of which may be good (strong economic growth) and some concerning (accelerating inflation).4
One question that income-seeking advisors may ask is: “At what point do income-seeking investors move from stocks to higher-yielding bonds?” That query may be answered if the 10-year Treasury yield moves above the dividend yield on the S&P 500.
Industry sectors were mixed in February, with Communication Services (+2.96 percent), Energy (+18.44 percent), Financials (+9.36 percent), Industrials (+4.15 percent), Materials (+0.69 percent), and Real Estate (+2.29 percent) advancing. Meanwhile, losses were felt in Consumer Discretionary (-6.00 percent), Consumer Staples (-2.10 percent), Health Care (-4.03 percent), Technology (-2.94 percent), and Utilities (-7.24 percent).5
What Investors May Be Talking About in March
Although the Fed remains committed to its zero-interest-rate policy, investors may be monitoring how the financial markets react to any pickup in inflation.6
Investors appear concerned about the Fed’s protracted easy monetary stance and federal fiscal spending in response to the pandemic.
For now, inflation remains within the Fed’s target range. However, expectations are rising, with the five-year forward expectations rate reaching a level not seen since 2019.7
Overseas markets were mixed at the start of the year, with the MSCI-EAFE Index gaining 0.56 percent.6
In Europe, France lost 2.74 percent while the United Kingdom slipped 0.82 percent. Germany provided a spark, picking up 5.21 percent.7
The Pacific Rim markets performed better. Hong Kong gained 3.87 percent and Japan added 0.80 percent. Australia tacked on 0.31 percent.8
Gross Domestic Product: The nation’s economy grew by 4.0 percent in the fourth quarter. For the full year, GDP dropped 3.5 percent.9
Employment: Total nonfarm payrolls declined by 140,000, led by losses in the hospitality and leisure sectors. The unemployment rate remained steady at 6.7 percent.10
Retail Sales: Retail sales fell 0.7 percent. Excluding motor vehicles and gasoline, consumer purchases fell a more substantial 2.1 percent.11
Industrial Production: Industrial production jumped 1.6 percent, well ahead of consensus estimates of a 0.5 percent increase.12
Housing: Housing starts increased by 5.8 percent, powered by a 12.0 percent jump in single-family homes.13
Existing-home sales reached their highest level in 14 years, with an increase of 0.7 percent in December. Sales were 22 percent higher than in December 2019.14
New home sales rose by 1.6 percent as the median price of new homes surged by 8.0 percent from a year ago.15
Consumer Price Index: Consumer prices rose 0.4 percent in December, driven by an 8.4 percent jump in gasoline prices. The inflation rate for 2020 came in at 1.4 percent.16
Durable Goods Orders: New orders for long-lasting goods increased 0.2 percent. Although it was the eighth straight month of gains, the figure was below expectations, reflecting the general economic softness in December.17
TIP OF THE MONTH
Too many people put a majority of their assets into a single stock (usually a company stock). Remember the merits of diversification. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline.
Minutes from the last Federal Open Market Committee (FOMC) meeting indicate that the Fed has reaffirmed its policy to keep short-term interest rates at current levels and continue its bond purchase program, citing uncertainty about the economy’s continued recovery.
While some Fed officials thought that near-term inflation might exceed its 2 percent target, they also believed that any price pressure would be short-lived.20
“At the Federal Reserve, we are strongly committed to achieving the monetary policy goals that Congress has given us: maximum employment and price stability,” Federal Reserve Chair Jerome Powell stated in his semiannual monetary policy report to the Congress.21
“Since the beginning of the pandemic, we have taken forceful actions to provide support and stability, to ensure that the recovery will be as strong as possible, and to limit lasting damage to households, businesses, and communities.”
10 YR TREASURY
Sources: Yahoo Finance, February 28, 2021
The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. U.S. Treasury Notes are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury Note prior to maturity, it may be worth more or less than the original price paid.
QUOTE OF THE MONTH
“Listen to ideas that make you think hard, not just opinions that make you feel good.”
THE MONTHLY RIDDLE
Some months have 30 days, others 31. How many have 28?
LAST MONTH’S RIDDLE: If an electric train is going south and the wind is blowing north, what direction is the smoke going?
ANSWER: Electric trains do not produce smoke.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Sterling Total Wealth Solutions and Cambridge are not affiliated.
To learn more about Sterling Total Wealth Solutions, visit us on the web at www.sterlingtotalwealthsolutions.com
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- The Wall Street Journal, February 28, 2021
- FactSet Research, February 19, 2021
- FactSet Research, February 19, 2021. “Earnings Insights”
- U.S. Department of the Treasury, February 2021
- SectorSpdr.com, February 28, 2021
- The Wall Street Journal, February 24, 2021
- Fred.StLouisFed.org, February 2021
- MSCI.com, February 28, 2021
- MSCI.com, February 28, 2021
- MSCI.com, February 28, 2021
- CNBC.com, February 25, 2021
- The Wall Street Journal, February 5, 2021
- The Wall Street Journal, February 13, 2021
- FederalReserve.gov, February 17, 2021
- CNBC.com, February 18, 2021
- The Wall Street Journal, February 19, 2021
- Bloomberg.com, February 24, 2021
- CNBC.com, February 10, 2021
- The Wall Street Journal, February 25, 2021
- The Wall Street Journal, February 17, 2021
- FederalReserve.gov, February 23, 2021