Rising rates continue to impact investor confidence
March 01, 2021
Equity markets look to rebound following a two-week losing streak, as investors’ perspective has quickly shifted from optimism to skepticism. The tone of trading was decidedly risk-off, with notable weakness in emerging markets and growth indexes, though weakness ranged from Treasuries to Bitcoin. The S&P 500® Index still managed a 3% gain for February and remains positive for the year despite the decline. Leadership in February came from value, small caps and international, with the large-cap technology names that drove last year’s performance stalling.
The focus of investors shifted from the accommodative backdrop provided by fiscal and monetary policy and the improving global economy to the rising rate environment. Since the end of 2020, the rise has accelerated, jumping from 0.92% to a high of 1.60% on February 25 on a combination of rising inflation expectations, the prospect for continued heavy issuance and a “taper tantrum” in reaction to nervousness that the Fed will begin to trim asset purchases.
February has seen the 10-year yield increase of more than 0.40%. Since 2003, there have only been eight months with larger moves higher in the 10-year yield, the most recent being after the election in 2016. Historically, though, a sharp move in interest rates has not led to prolonged equity weakness. In the previous eight occasions since 2003 exhibiting larger moves in rates, the S&P 500® Index rose over the following 12 months, with an average gain of 17%.
Investor sentiment has begun to shift, with the CNN Fear & Greed Index below 50 and the Global Fear & Greed Index turning negative despite the S&P 500 within just 2% of a record high. Flows remain strong, with more than $40 billion of inflows in the last four weeks, the highest level in three years.
As expected, House Democrats passed the $1.9 trillion stimulus bill, setting the stage for the Senate to begin debate, and have it to President Biden’s desk before the March 14 deadline when jobless benefits expire. The plan includes $1,400 checks to many Americans, extended and enhanced federal unemployment assistance, $350 billion in state and local governments and funding for vaccine distributions, food stamps and schools. Next will be negotiations around an infrastructure bill, which has general bipartisan support but severe differences over funding. Progressives are pushing the reversal of the Trump tax cuts, while centrists and Republicans are pushing back.
Johnson & Johnson began shipping their version of the Covid-19 vaccine Sunday following the passage of the emergency-use authorization, with hopes to deliver 20 million doses by the end of March and 100 million by the end of June. The number of cases has declined more than 70%, hospitalizations have dropped 64% and deaths have fallen by 35%, though the metrics have seen a modest uptick recently. The positivity rate has dropped to near the lowest level since the outbreak.
There are mixed signals on the economy’s emergence enhanced shutdown measures in recent months, with many high-frequency data points deteriorating in recent weeks. The NY Fed’s Weekly Economic Index deteriorated in the most-recent reading to the lowest level since October, while mobility data showed the lowest level of activity in retail and restaurants since May. Personal income jumped 10% in January due to $600 stimulus payments, while personal spending was a lower-than-expected 2.4%, resulting in the personal savings rate of 20.5%. Inflation remains in check, with the PCE deflator up 1.5% from a year ago.
Fourth-quarter earnings season is essentially over, with a near-record 80% of companies beating estimates by an average of 15%. As a result, earnings grew by 4% compared with an expected loss of 11% coming into earnings season. Looking forward, the first quarter is currently expected to grow by 18% on 3% sales growth and 2021 estimates are for 24% growth. Highlights from management commentary included rising margins, higher inflation and input costs, improved pricing power and more aggressive capital allocation (acquisitions, share repurchases, etc.).
What to Watch
Economic data this week include manufacturing and construction data on Monday, PMI data and the Fed’s Beige Book on Wednesday, durable goods on Thursday and the monthly payroll report on Friday.
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