February Market Overview
Equity markets were broadly higher in February, though returns varied considerably across investment styles: Investors clamored for companies poised to benefit most from rebounding economic growth, which benefitted Value and Small Caps, while the appeal of Growth and Large Caps lost some luster. To illustrate this for Large Caps, we point to the Russell 1000 Value, which climbed 6%, while the Russell 1000 Growth was flat for the month. In Small Caps, the Russell 2000 Value rallied 9.4%, while the Russell 2000 Growth climbed 3.3%.
The central theme for the month was “reflation,” or a return to growth following the meaningful contraction last year. There are several underlying factors contributing to the reflation trade, which are generally rooted in the path forward as the pandemic wanes. In particular, markets are optimistic for another round of economic stimulus in the U.S., which will bolster consumption. As of this writing, this is a proposed $1.9 trillion package, though it has not currently been passed into law. Meanwhile, daily COVID-19 cases continue to decline and vaccines are making their way into communities around the world. As the pandemic gets under control and economies reopen more broadly, there will be ample room for growth as consumers return to more typical routines and consumption patterns.
The reflation trade has also been accompanied by a meaningful rise in many energy, metal, and agricultural commodities this year. By way of example, from the beginning of the year through the end of February, WTI Crude Oil rallied by 26%, Copper climbed 18%, and Corn was up 13%.
Recent economic datapoints also support the improving economic outlook. In particular, the ISM manufacturing index reached 60.8 in February – the highest level in several years. Consumer confidence is also nudging higher, with a reading of 91.3 in February, up somewhat from 88.9 in January. And the unemployment rate has also declined to 6.3% in January (most recent data) from 6.7% in December.
Another byproduct of the improving economic outlook and rising commodity prices is the prospect for higher inflation. Thus far, inflation has remained benign, coming in at just 1.3% in the fourth quarter and 1.2% for 2020. However, the consensus inflation rate for 2021 is 2.2%, though it is expected to reach a high of 2.9% in the second quarter. The market anticipates inflation will remain above 2% through 2023, somewhat higher than the last couple of years, but not menacingly high by any stretch.
In Fixed Income, the yield curve steepened throughout the month as short-term rates remain very near zero, while mid-long-term rates climbed. The steepening of the yield curve is the natural result of the combination of the reflation trade, increased commodity prices, and the renewed market expectations for an increase in inflation. For some perspective on how significantly rates moved in February, we look to the 10-year Treasury, which climbed from 1.07% at the beginning of the month to 1.40% by month end.
In light of the steepening of the yield curve and the inverse relationship between bond prices and yields, bonds declined variably for the month. Those with the shortest maturities declined only slightly, while those with longer maturities declined several percentage points.
We maintain our favorable view on the outlook for a strong rebound in economic growth this year, though we also recognize that investor sentiment is remarkably bullish and valuations are not inexpensive, which certainly would not be a good combination if investor expectations do not come to fruition. These dynamics cause us to maintain our balanced view on the outlook for the markets over the near-medium term.
The monthly Market Overview is written by two members of MACRO’s Investment Committee: Mark Cortazzo, CFP®, CIMA®, and Christopher Moffett, CFA.
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