April Economic Update
Improved economic conditions and broadened vaccine programs ignited a broad stock market rally, though rising treasury yields dragged on technology and high-growth stocks. The Dow Jones Industrial Average led the bullish sentiment for the month of March, picking up 6.62%. The broad-based S&P 500 Index rose 4.24%, while the tech-heavy Nasdaq Composite lagged out of the three major averages gaining 0.41%. (1)
The month began strong, thanks to a retreat in Treasury bond yields, solid economic reports, and the approval of another vaccine. However, enthusiasm faded when bond yields once again climbed higher following Federal Reserve Chair Jerome Powell’s belief that inflationary pressures will be felt in the future. Later in the month, yields leveled off and stocks resumed their advance, aided by the signing of the $1.9 trillion stimulus bill into law and another round of upbeat economic reports. (2)
Technology stocks and high-growth stocks played a limited role in the March rally as investors rotated their portfolios into other sectors, including cyclical names. The Nasdaq Composite early in the month flirted with a correction, defined as a 10 percent or greater pullback from a recent high.
Encouraging economic data was reported within manufacturing activity, as measured by the ISM Manufacturing PMI (Purchasing Managers Index), which reached 60.8 - a three-year high. The IHS Markit U.S. Services PMI registered even stronger relative gains, posting its biggest expansion since July 2014. (3,4)
Contrasting this positive economic narrative is a more mixed picture for the labor market. While the unemployment rate has come down from its elevated levels in 2020, improvement has slowed. The unemployment rate for February 2021 was 6.2%, a modest decline from its December 2020 rate of 6.7%. (5)
During the March announcement, the Federal Reserve maintained their near-zero interest rate policy and monthly bond purchasing program.Officials stated they expect some pickup in inflation this year, but price increases would be “transitory” (i.e. not permanent). To date, inflation pressures have been noted in commodities prices and real estate but large inflationary pressures for consumer goods and services have remained muted despite the government’s stimulus packages and the Fed’s actions. (6)
A new earnings season is fast approaching, and investors will be poring over financial statements to gauge the recovery efforts in the post-vaccine world. Thanks to the fiscal stimulus, vaccinations, and more reopenings, many economists believe growth will accelerate at the macro level. Economic reports, such as retail sales and industrial production, will help to measure the momentum of the recovery.
However, inflation numbers will continue to be closely scrutinized. Any pickup could rattle investor confidence in the Fed’s policy to keep the short-term rates near zero - a central pillar supporting the financial markets. Additionally, potential concerns are increasingly immerging regarding the rise of COVID cases in the U.S. and what risk variant strains of the virus may pose.
Many positive signs have emerged over the past month, both economically and due to vaccines. We will keep an open and optimistic mind while moving into the second quarter but also be mindful of any potential risks which may arise.
Monthly Financial Tip:
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1. The Wall Street Journal, March 31, 2021
2. CNBC.com, March 11, 2021
3. tradingeconomics.com, April 1, 2021
4. tradingeconomics.com, April 1, 2021
5. federalreserve.gov, April 1, 2021
6. Reuters.com, March 17, 2021
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.