March 2021 Monthly Economic Update
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 reported results that exceeded Wall Street expectations. Upon closer evaluation the companies, on average, reported earnings that are 14.6 percent above estimates, which is 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?" Some feel that some movement may occur upon the 10-year Treasury yield moving above the dividend yield of 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
A pickup in global economic activity spurred international stocks higher, with the MSCI-EAFE Index climbing 5.16 percent.8
Broad gains were made in major European markets. France picked up 5.63 percent, Germany 2.63 percent, and the U.K. 1.19 percent.9
Stocks in the Pacific Rim markets also performed well, with solid numbers in Japan and Hong Kong. The Hang Seng index is up 6.42 percent year-to-date.10
Gross Domestic Product: The nation's economic growth for the fourth quarter was revised higher from 4.0 percent to 4.1 percent.11
Employment: The U.S. economy added 49,000 jobs in January, as continued weakness in the leisure and hospitality industry dragged down overall results. The unemployment rate fell to 6.3 percent due to the declining number of people looking for work.12
Retail Sales: Retail sales rose 5.3 percent, propelled by strong gains in home improvement, work-from-home (e.g., furniture and electronics), and spending in restaurants and bars.13
Industrial Production: Industrial production jumped 0.9 percent, with gains in manufacturing and mining offsetting a decline in utilities.14
Housing starts posted a disappointing 6.0 percent decline, as single-family home construction dropped 12.2 percent. However, a 10.4 percent rise in homebuilding permits suggested that the housing market remained healthy.15
Existing home sales edged 0.6 percent higher, as a limited supply of homes for sale drove a 14.1 percent price increase from a year earlier.16
New home sales rose 4.3 percent in January, the highest level in three months and above consensus estimates.17
Consumer Price Index: Inflation rose 0.3 percent to settle at 1.4 percent for the 12-month period, which ended in January.18
Durable Goods Orders: Orders for long-lasting goods rose 3.4 percent, marking the ninth straight month of increases and the most significant leap since July 2020.19
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."
Sources: Yahoo Finance, February 28, 2021
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1. The Wall Street Journal, February 28, 2021
2. FactSet Research, February 19, 2021
3. FactSet Research, February 19, 2021. "Earnings Insights"
4. U.S. Department of the Treasury, February 2021
5. SectorSpdr.com, February 28, 2021
6. The Wall Street Journal, February 24, 2021
7. Fred.StLouisFed.org, February 2021
8. MSCI.com, February 28, 2021
9. MSCI.com, February 28, 2021
10. MSCI.com, February 28, 2021
11. CNBC.com, February 25, 2021
12. The Wall Street Journal, February 5, 2021
13. The Wall Street Journal, February 13, 2021
14. FederalReserve.gov, February 17, 2021
15. CNBC.com, February 18, 2021
16. The Wall Street Journal, February 19, 2021
17. Bloomberg.com, February 24, 2021
18. CNBC.com, February 10, 2021
19. The Wall Street Journal, February 25, 2021
20. The Wall Street Journal, February 17, 2021
21. FederalReserve.gov, February 23, 2021