March Market Overview
Equity markets continued their upward trajectory in March, with many major indexes up several percentage points as investors anticipate solid growth prospects and a strong economic outlook. Indeed, there are many reasons to be optimistic as stimulus money flows through the economy, more people get vaccinated against COVID-19, and President Biden advocates for a massive $2.25-trillion infrastructure bill.
Some major economic datapoints, such as consumer confidence, jobs and manufacturing data, have validated that optimism. Consumer confidence climbed significantly from 90.4 in February to 109.7 in March – the highest reading in the last year. These strong consumer confidence numbers are likely attributable to several factors, including the additional stimulus checks that many people are receiving, the broader distribution of vaccines to combat the COVID-19 pandemic, and the fact that employment is continuing to rebound. In fact, March jobs data far outpaced market expectations as employers added 916,000 new jobs (forecasts called for a gain of 675,000) and the reported unemployment rate declined to 6%. Meanwhile, the ISM manufacturing index climbed to 64.7 in March, its highest level since 1983.
We are particularly encouraged by the strength and confidence of the U.S. consumer and believe that consumer spending is poised to accelerate significantly as a dramatic amount of pent-up demand will be released as pandemic-related concerns wane. That said, we also anticipate fits and starts in the data, depending on the timing of government stimulus programs.
The strengthening economy has also given rise to two dominant themes among investors: the prospects for higher inflation, and higher interest rates. Though inflation has not yet appeared in earnest (inflation was 1.7% in February), the market expects it to climb to 2.5% in March and remain above 2% for the remainder of the year. This level of inflation is certainly higher than consumers have experienced in recent years; however, the Federal Reserve has maintained its views that inflation will remain under control. We too believe inflation will climb this year, but that it will remain at manageable levels – even if it means the Fed has to intervene with policy measures.
The expectation for higher interest rates caused most of the Fixed Income universe to decline over the course of the month, although Municipals eked out slight gains. Performance was best for shorter maturities, while longer maturities experienced greater declines. As we have discussed in prior months, the weakness in Fixed Income relates to investors’ expectations for more robust growth and a related expectation for higher interest rates in the mid-long term. In fact, the rapid change in investors’ perceptions on the macroeconomic outlook caused Treasuries to suffer their worst quarterly performance since 1980.
Looking ahead, the market will soon be hearing from companies with first quarter earnings results – and while we expect most will articulate optimistic views, it is important to remember that this is widely anticipated by investors. As such, there is some potential to see some added volatility in coming weeks, though if this comes to fruition, we expect it will be short-lived, and it should not distract investors from what is poised to be a remarkable economic rebound.
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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