March 22, 2021
- Despite a positive start, stocks pulled back later in the week and ended down from record levels. We saw global markets (represented by the MSCI All Country World Index) down -0.4% and domestic stocks (represented by the S&P 500 Index) down -0.7%. U.S. small companies saw the most volatility, with the Russell 2000 Index down -2.8% for the week.
- Markets, once again, were primarily focused on the rhetoric of Fed Chairman Jerome Powell. The yield on the 10-year Treasury bond rose above 1.7% during the week, which is pretty shocking given we started the year closer to 0.9%. Chairman Powell strongly reiterated their stance on keeping interest rates low for the foreseeable future, likely through 2023. With regards to inflation, he communicated that any near-term inflation increase will be short-lived.
- Why are bond yields moving so much? It’s important to remember what drives bond yields at different parts of the maturity curve. The Federal Reserve can manipulate short-term interest rates; however, longer-term bond yields are driven primarily by economic growth and inflation expectations. Inflation is an enemy to most bonds, as rising inflation eats away at the flat interest that a bond will pay its owner. As investors come to grips with realistic expectations for inflation, we do expect bond yields will continue to move in both directions. We personally don’t believe inflation will increase so much in the short-term that the Fed will be forced to raise interest rates quicker than anticipated.
- While oil prices have recovered substantially over the last year, investors will have to keep an eye on underlying supply and demand fundamentals. Oil prices fell 8% on Thursday before recovering above $61/barrel on Friday, as investors weigh future demand in Europe and still grapple with the pandemic.
- The date March 23rd, 2020 will be forever engraved in my mind. That was the day the stock market bottomed during the beginning of the pandemic. It’s hard to believe we’re coming up on a year since that date and thought I’d share some stats on how far we’ve come. Since the market bottom on 3/23/20 through Friday 3/19/21, both global and domestic stocks are up over 77%. Most impressively, U.S. small cap companies are up just under 131%. As we’ve been saying for some time now, the market is forward-looking. We’re now looking for economic data to catch up and justify the prices we’re seeing in markets. From my perspective, it’s still incredible that we’re already a year out from that day.
- I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.
Mike Horwath, CFA
Chief Investment Officer