March Economic Update
For the month of February, stock rose to set new highs before pulling back towards the end of the month. By month’s close, the S&P 500 gained 2.61%, the Nasdaq rose 0.93%, and the Dow Jones lead the three by rising 3.17%. Since the February highs, the markets have retreated in large part due to rising bond yields which was covered in depth in our newsletter last month. (1)
The “A” topic on Wall Street recently has been the precipitous rise in U.S. treasury yields over the past month, with the 10-year yield now exceeding 1.5%. Rising bond yields applies pressure on stock prices as investors begin to perceive U.S. treasuries as a more attractive risk-adjusted-return when compared to stocks. Bond yields typically increase for several reasons, which at this time can largely be attributed to anticipated future economic strength, in addition to growing concerns over the potential for increasing inflation.
While stocks typically tend to rise in an inflationary environment, they also may experience fundamental pressures such as higher debt service costs for companies with larger debt burdens. Generally, growth, technology, and dividend-paying stocks experience greater sensitivity to higher bond yields when compared to value stocks. The recent move in bond yields has been noted by the Federal Reserve but have repeatedly stated they will not intervene at this time and are committed to its zero-interest-rate policy. In reaction to these statements, the markets have experienced increased volatility in recent weeks as a biproduct of the Fed’s prolonged easy monetary stance, in addition to more government stimulus being administered by Congress.
Positive Economic News
Economic strength was evident in reports released for 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.
With the fourth quarter earnings season wrapping up, many companies surprised analysts. Of the 83 percent of S&P 500 companies that delivered reports, 79 percent of those reported results that exceeded Wall Street expectations. Upon closer evaluation the companies, on average, reported earnings that are 14.6 percent above estimates, which are substantially above the 6.3 percent five-year average. (3)
Inflation and bond yields will likely continue to dominate the Wall Street headlines in the coming month. One question investors and advisors are posing is, "at what point do income-seeking investors move from stocks to higher-yielding bonds?" A closely watched metric to answer this question is whether the 10-year treasury yield (currently near 1.55%) exceeds the dividend yield of the S&P 500 (approximately 1.50%). While these yields have been closely matched since the end of February, many investors favor holding stocks in their portfolio for the growth potential, in addition to the dividend yield received. (4,5)
The markets will continue to weigh the positive news of declining COVID cases and vaccines, mostly positive economic data, and strong earnings reports against the forces of higher bond yields. The markets remain near all-time highs, but any headwinds will be closely monitored and scrutinized by analysts in this coming month.
Monthly Financial Tip:
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1. FactSet Research, January 22, 2021. “Earnings Insights.”
2. FactSet Research, January 29, 2021
3. FactSet Research, January 25, 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.