March Market Recap

April 1, 2021

Some anniversaries are easier to remember than others.

March 23 is a significant one. It marks the date of the bear-market bottom established one year ago, when the S&P 500 had fallen 35% and COVID-19 was still new to our vocabulary.

You would have been laughed out of your local investment club (or your first Zoom happy hour) at the time for suggesting stocks were on the verge of a 70% rally in the year to come. And yet 12 months later, this is where we are.

Better than 70% actually if we include gains from the final week of March. The S&P finished the first quarter of 2021 on the verge of hitting 4,000 for the first time. The Dow Jones Industrial Average recently eclipsed 33,000. And the NASDAQ, despite cooling its jet-like acceleration in recent months, has nearly doubled from its March 23, 2020 low.

In a complete reversal from a year ago, every one of the 11 sectors in the S&P 500 moved higher in March. Utilities (+10.5%) and Industrials (+8.9%) climbed the most. Technology (+1.7%) was the worst performer as a rotation out of high-valuation growth names continued. Energy (+2.8%) also lagged last month, though it remains the best-performing sector year-to-date.

Index	March 2021	YTD 2021
Dow	+6.62%	+7.76%
S&P 500	+4.24%	+5.77%
NASDAQ	+0.41%	+2.78%

Bonds rarely get top billing in these summaries, but inflation concerns and rising interest rates have become more significant drivers of stock prices in recent months. 10-year Treasury yields continued to surge higher in March, reaching 1.75% (compared to 1.46% a month earlier). As recently as New Years Eve, those yields were below 1%.

The move is rooted in expectations of especially strong economic growth. The Federal Reserve in March boosted its growth outlook for the US economy to 6.5% in 2021, sharply higher than the 4.2% it forecast in December. The Fed has yet to adjust its near-zero rate policy, but the bond market is essentially making that change on its own.

Fed Chair Jerome Powell has been adamant the Fed will allow inflation to trend higher than its official 2% per year long-term target and focus instead on what is best for the US labor market. The early March employment report showed 380,000 jobs were added to the economy in February (nearly double consensus expectations). January data was revised higher as well.

The pairing of still dovish central bank policy with government spending sprees seems an entrée investors can’t get enough of. On March 11, President Joe Biden signed into law his $1.9 trillion stimulus package, which includes $1,400 checks and an expanded child tax credit for eligible Americans, among other things. Although the bill was passed with zero Republican support, polls suggest the vast majority of American voters approve of the legislation, including 40-60% of registered Republicans.

It’s no surprise “free money” is generally met with open arms, although growing inflation pressures reflect the reality that trillions in liquidity won’t come without some long-term costs. With his approval numbers high and his Democratic majority in tact (for now), Biden has already shifted the political attention to a proposed $2 trillion infrastructure plan that would raise the corporate tax rate. It will, no doubt, remain in the Washington spotlight for months to come.

Small-cap and tech stocks both lagged the broader market in March. The Russell 2000 index gained less than 1% last month, although its 12.4% year-to-date return still doubles the S&P 500. The NASDAQ, meanwhile, recorded an official correction by dipping a full 10% from its mid-February high. It has since recaptured about half those losses.

Large-cap Value stocks remained popular and have outperformed Large-cap Growth for seven weeks in a row. International equities offered a mixed bag as Non-US Developed stocks rose 2.5% in March, but Emerging Markets fell slightly.

Oil prices reached their highest point in two years thanks in part to the latest OPEC production agreement. West Texas Intermediate crude touched $66 per barrel in March before retreating.

The rate of US vaccinations continues to accelerate. 100 million Americans, roughly 30% of the population, have now received at least one does of the COVID-19 vaccine.

January Market Recap

February 1, 2021

If you are among the investors who believe January performance helps to forecast what will happen in the year ahead, well, your crystal ball remains a little murky after the first month of 2021.

The Dow Jones Industrial Average and S&P 500 both finished lower in January, but the tech-heavy NASDAQ managed to stay positive. International equities produced similarly mixed returns. Emerging Markets gained 3.2% last month while Non-US Developed equities lost 0.8%. Large cap stocks were generally down. Small caps stocks were mostly up.

The mixed results feel appropriate if you acknowledge all the variables this market is trying to make sense of:  The new balance of political power in Washington. Encouraging vaccine data but historically high new cases of COVID. Massive liquidity still filtering its way through the financial system. And most recently, the short-squeezing saga of Reddit users high on GameStop shares targeting hedge funds in a high-profile Main Street vs Wall Street battle.

Just four of the 11 sectors in the S&P 500 delivered profits in January. Only two of those, Energy (+3.8%) and Health Care (+1.4%) booked gains of at least 1%. Consumer Staples (-5.2%) and Industrials (-4.3%) were the worst-performing categories.

Index	January 2021	YTD 2021
Dow	-2.04%	-2.04%
S&P 500	-1.11%	-1.11%
NASDAQ	+1.42%	+1.42%

Believe it or not, it was less than a month ago that the balance of American political power was still up for grabs. Two runoff elections in Georgia on January 5 produced victories for Raphael Warnock and Jon Ossoff, an unexpected outcome that gave Democrats control of the US Senate, along with the House of Representatives.

The day after, January 6, brought a riot and storming of the US Capitol that resulted in five people dead. One week later, the House impeached Donald Trump for “incitement of insurrection,” effectively scheduling a strange final episode to Trump’s most unusual presidency. On January 20, Joe Biden was sworn in as the country’s 46th President.

It was, by any standard, an incredibly bizarre series of events and yet the stock market behaved as though the political theater was performing a mere dress rehearsal. The S&P 500 rose 4% between January 4 (the night before the runoff elections) and January 20 (the date of Biden’s inauguration).

To be honest, we view the political circus more as a distraction than a meaningful driver of market movements, so it was a pleasant surprise to see all three major US stock indices trading near all-time highs on January 25. What happened next was truly unpredictable.

The Dow, S&P 500, and NASDAQ all fell more than 3% in the final week of January, triggered in part by the high-profile short-squeeze involving GameStop and other stocks coordinated by a pool of investors on Reddit message boards. Although the extreme volatility was concentrated in only a handful of stocks (Blackberry, AMC Entertainment, Bed Bath & Beyond, and American Airlines among them) concerns of market manipulation created unease and no doubt increased the selling pressure.

Our view is that the GameStop story is unlikely to have any lasting consequences for long-term investors. Hedge funds will certainly be more mindful of disclosing their short positions, but major regulatory changes are not in the cards. If anything, it’s more reason to stick with traditional (long-only) investments and custody assets with large broker-dealers, rather than discount trading platforms that restricted market access to some clients.

Buried in the drama of the GameStop headlines, another quarter of corporate earnings were being reported in late January. And yet again, real earnings are beating consensus expectations. With 37% of companies reporting, the S&P 500 is on pace for a blended earnings decline of 2.3%, according to FactSet data research. Consider that as of year-end, projections called for a cumulative decline of 9.3%, year-over-year.

Small-cap stocks, as mentioned earlier, continued their relative outperformance. The Russell 2000 increased 5% last month. That’s after climbing more than 30% in the final three months of 2020, the best quarter for small-caps in more than 40 years.

Emerging Markets were the other noticeable outperformer in January, thanks to positive data out of China. The Chinese government reported accelerated economic growth in the fourth quarter and annual growth of 2.3% last year. That makes China the world’s only major economy (so far) to have grown, rather than contracted in a pandemic-riddled 2020.

Vaccine developments remain a silver lining in what is still a steep hill to climb in the world’s battle against COVID-19. A single-dose vaccine developed by Johnson & Johnson is expected to soon earn approval from the US Food and Drug Administration (FDA), which would add to the supply of vaccines available for distribution.

The first piece of legislation introduced by the Biden administration was a proposed $1.9 trillion stimulus package that includes another round of direct payments to Americans, plus more money for COVID-19 testing and vaccine distribution. It would be the third major round of stimulus from the US government. The first (CARES Act) was passed in late March 2020. The second was agreed to in late December. Republicans have so far preferred a more modest aid package, but the Democrats likely have the votes to pass Biden’s plan even without Republican support.  

10-year Treasury yields rose above 1% in January for the first time in 10 months. The number climbed as high as 1.19% on January 12 before finishing the month at 1.09%.

Oil continued to grind higher, boosting Energy stocks along the way. West Texas Intermediate Crude increased an additional 7.6% in January and closed the month trading at $52.20 per barrel. Oil prices have shot 46% higher in the last three months combined. Gold prices drifted lower, falling 3.2%.

November Market Recap

December 1, 2020

So much for all the concern that a contested election would harm the stock market. Despite a change in Presidential leadership and the legal disputes that followed, US stocks just completed their best single month in 33 years!

Each of the three major indices gained more than 10% in November, shrugging off unfounded claims of election fraud and a steady rise in COVID-19 cases. The Dow Jones Industrial Average surpassed 30,000 for the first time. The NASDAQ again topped 12,000. Both of them, along with the S&P 500, finished the month near all-time highs.

While November began with our country’s focus squarely on the election, it ended with a wave of positive momentum created by encouraging vaccine developments. The market after all is relentlessly forward-looking, and a finish line finally appears in sight in the race to cure COVID.

All 11 sectors in the S&P 500 booked gains in November. Energy (+28%) and Financials (+16.9%) finally enjoyed a month in the sun, although they remain the two worst-performing sectors year-to-date. Industrials (+16%) were also among the best performers. Utilities (+0.7%) and Real Estate (+7%) were the relative laggards.

Index	November 2020	YTD 2020
Dow	+11.84%	+3.86%
S&P 500	+10.75%	+12.10%
NASDAQ	+11.80%	+35.96%

The other race — the one for the White House — ended with Joe Biden unseating Donald Trump, although the historically high number of mail-in ballots did result in the outcome being delayed a few days longer than usual. Significantly, Republicans appear likely to maintain a narrow majority in the Senate, although that will remain uncertain until the conclusion of two Senate runoff elections in Georgia on January 5.

As they often do, financial markets surged in the days following the election. The S&P popped more than 5% in the four trading days immediately after Election Day. Consider it an endorsement of the probability that political power in Washington will remain split. Should Democrats pull an unlikely upset in the Georgia runoffs and turn the Senate blue as well, that could lead markets to recalibrate.

The political theater suddenly feels like a sideshow, however, after news that multiple vaccines blew away medical expectations in their most recent clinical trials. Biotech company Moderna’s vaccine had a 94% efficacy rate in a trial involving 30,000 people. Only 11 people who received two doses of the vaccine developed COVID-19 symptoms compared to 185 people in the placebo group.

The Moderna vaccine was also 100% effective at eliminating “severe disease.” The company has already applied for emergency use authorization from the US Food and Drug Administration. Pfizer and BioNTech are other companies that have developed comparable vaccines and reported similarly impressive results.

Stocks got an extra jolt the week of Thanksgiving when the Trump administration begrudgingly began the peaceful transition of power toward a Biden presidency. On the same day, Biden named former Federal Reserve Chair Janet Yellen as his presumptive US Treasury Secretary.

Third-quarter earnings season concluded with S&P 500 earnings declining 6% cumulatively from a year earlier. Three industries in particular — Oil & Gas, Airlines, and Hotels/Restaurants — dragged down the overall number. Excluding those three components of the US economy, S&P 500 earnings grew more than 4% year-over-year.

As vaccine progress spurred hopes of a more broad-based economic recovery, several categories that have lagged year-to-date outperformed in November. Small-cap stocks exploded higher with the Russell 2000 index gaining 18.3%. Non-US Developed equities rose 14.3%. Emerging Markets equities increased only 9%.

Official numbers reported by the US Commerce Department confirmed that American GDP grew at an annualized pace of 33.1% in the third quarter. Consensus growth estimates for the fourth quarter, however, are below 5% annualized. Economic forecasts for the first quarter of 2021, meanwhile, have been revised lower following the latest spike in COVID-19 cases and another round of mitigation measures.

Interest rates have remained stubbornly steady, a modest surprise given that a sharp increase in stock prices would typically send rates higher as well. The 10-year US Treasury bond finished November yielding 0.84%, two basis points lower than a month earlier (0.86%).

Unemployment claims rose in each of the last two weeks, the first instance of back-to-back weekly increases since July. It’s a sign the recovery in the US labor market is slowing and remains vulnerable.

Oil prices climbed every week in November and rose to their highest level in eight months. West Texas Intermediate Crude finished the month trading just above $45 per barrel.

September Market Recap

October 1, 2020

Those suggesting that a furious summer rally left stock prices ripe for a pullback were at least somewhat vindicated in September. Equities entered the month at or near all-time highs before downward pressures pushed them lower.

The S&P 500 fell in four consecutive weeks – the longest such streak in more than a year – and registered a peak-to-trough decline of more than 10%. The NASDAQ, for a change, posted the worst monthly performance of the three major benchmarks as Tech stocks proved more vulnerable to the selloff.

Only two of the 11 sectors in the S&P booked gains in September, those being Materials (+1.3%) and Utilities (+1.1%). Energy (-14.5%) continued what has become an historic year-to-date collapse, having now lost nearly half its value (-48%) in the first nine months of 2020. Communication Services (-6.5%) and Technology (-5.4%) also suffered legitimate losses last month.

Index	September 2020	YTD 2020
Dow	-2.28%	-2.65%
S&P 500	-3.92%	+4.09%
NASDAQ	-5.16%	+24.46%

Speculation about potential vaccines for COVID-19 is understandably popular, and some encouraging rumors led equities to all-time highs early last month. It was reported on September 2 that the Centers for Disease Control and Prevention told state governments to prepare for vaccine distribution by early November. That launched the S&P near 3,600, the NASDAQ beyond 12,000, and the Dow above 29,000 for the first time since February.

From there, however, it was a downhill ride. The NASDAQ fell 10% in just three trading days. While the sudden selloff was partially attributable to stretched valuations and staggering performance since the March lows, it was also due to a realization that more stimulus from Congress was no longer inevitable, and certainly not imminent.

The major US indices continued to drift lower for most of September before bouncing a bit in the final few days of the third quarter. The latest reports on stimulus negotiations suggest a gap of roughly $600 billion in competing proposals; $2.2 trillion (from Democrats) compared to $1.6 trillion (from Republicans). As of month’s end, the House of Representatives and US Senate had yet to find common ground.

Government stimulus (or its absence) matters, of course, because we are still in a global pandemic and new cases of coronavirus are again increasing in many US states. We remain, in other words, far from the finish line. The economic recovery, meanwhile, has definitely slowed.

Disney, Allstate, American Airlines, and United were among the companies who recently announced plans to fire or furlough a combined 60,000 workers as the pandemic drags on, acting like a wet blanket on a US economy desperate for a spark. The latest employment data from the US Labor Department is expected to show that cumulatively, around 50-60% of total American jobs lost earlier this year have been recovered.

The Federal Reserve and its chairman, Jerome Powell, assumed a quieter role in September than in previous months, although the Fed continues to support financial markets through steady asset purchases. As of mid-September, the Fed had accumulated $1 trillion worth of mortgage bonds since March and now owns nearly one-third of all mortgage bonds outstanding.

Powell told Congress that the US economy needs additional support and still has a long road ahead to fully recover. The economic path, in Powell’s words, “continues to be highly uncertain.”

Bond yields remained mostly unchanged from a month earlier. The 10-year US Treasury finished September yielding 0.68%. Gold prices fell roughly 4% as the US dollar strengthened meaningfully for the first time in six months. Gold is down nearly 10% from the all-time highs it established in early August.

International equities outperformed US stocks last month. Non-US Developed Markets lost roughly 2%. Emerging Markets were down only 1%.

More and more investors seem concerned about the financial risks posed by uncertain election outcomes. September 29 brought the first Presidential debate, which gave us more interruptions than insight. Despite being widely panned afterward as a parody of our country’s political process, the fact that stocks moved higher the following day displayed the resilience of markets in the face of political uncertainty.

Some argue the predictably low taxes and deregulation offered by our incumbent President would be advantageous. Others suggest Democratic control would boost markets because it will lead to larger government stimulus. Our perspective is that nobody knows for sure, and that equities have proven successful in all types of political climates.

Resist the urge to make financial decisions based on your political preferences.