Fidelity Bank - Wealth Management
February 2021 Market Review
Declining infection rates, exponential vaccine deployment, and rising inflation and economic growth expectations helped push global equity markets higher in February. The US is progressing well with its vaccination program and could achieve a large-scale reopening of its economy in the second half of the year. At the end of the month, the Johnson & Johnson single shot COVID-19 vaccine was approved for emergency use. The US has now brought to market three highly effective vaccines approved for use by the FDA. As of month end, more than 81,000,000 vaccine doses had been administered in the US. After selling off in January, the S&P 500 gained 2.76% in February. With inflationary pressures rising driving long-term interest rates higher, the Bloomberg Barclays Aggregate Bond Index sold off, losing 1.44% in February.
Institute of Supply Management PMI surveys, which tracks sentiment among purchasing managers at manufacturing, construction and/or services firms, rebounded after a slight decline in January to 58.7. ISM PMI rebounded to 60.8 in February signaling additional confidence in the economic rebound. A PMI reading above 50 indicates expansion, while below 50 indicates contraction.
Large Cap Value stocks beat Large Cap Growth stocks by 6.06% in February. This sizable outperformance represents the largest monthly outperformance by Value Stocks since March 2001. From a statistical standpoint, that is more than a 2.3 standard deviation event based on data since 1979. As noted in the December market review, on almost every valuation metric, Growth Stocks are historically overvalued versus Value Stocks. An uptick in inflation and interest rates combined with low valuations may act as a significant tailwind for Value Stocks in 2021. The story was the same in the Small Cap space. Value beat Small Growth by more than 6%; gaining 9.39% while Small Growth gained 3.30%. Over the past 6 months, Large Value has beat Large Growth by 13.81% while Small Value has outperformed Small Growth by 9.09%
8 of 11 Global Industry Classification (GIC) sectors were positive in February. Energy, Financials, and Communication Services were the leaders gaining 22.50%, 11.49%, and 7.03%, respectively. Utilities (-6.12%) and Health Care (-2.11%) were the laggards. Utilities faced pressure as heating and electricity demand surged as arctic air brought record low temperatures to much of the central US.
A late month rally in the US Dollar depressed returns for US investors in international developed markets. For the month, the MSCI EAFE index gained 2.62% in local currency terms but only gained 2.24% in US Dollar terms. A similar story played out in Emerging Markets; the MSCI Emerging Markets Index gained 1.03% in local currency and the conversion to US Dollars decreased that gain to 0.76% for US investors.
As market inflation expectations continued to rise in February, traders and investors priced in a stronger economic recovery and additional stimulus from Washington. Pressure has been mounting on longer term interest rates, which have been rising steadily since August. The Federal Reserve continues to target a long-term 2.00% inflation goal and has indicated a willingness to allow inflation to trend above 2% in the short-term. As of the end of February, ten-year market implied inflation stood above the Fed’s target at 2.14%.
The yield curve continues to get steeper as short-term rates(1M -1Y) have drifted lower since the Fed cut rates last year, while longer term rates (2Y-30Y) have shot higher since their lows in August 2020. In February alone, 5 Year to 30 Year rates moved higher by more than 30 basis points! On February 25th, the 10 Year rate raced as high as 1.61% during intraday trading. Rising rates dropped Treasury prices by 1.81% and TIPS fell by 1.61% in February.
The Bloomberg Commodities Index posted another strong return of 6.47% in February as rising inflation expectations, winter weather, and increased demand boosted prices. Energy Products, Industrial Metals, Soft Products(which includes Lumber) led the way in advancing 15.40%, 10.14%, and 9.22%, respectively. Consumers are likely seeing their wallet feel a bit lighter after visiting the gas station. Regular Unleaded Gasoline rose by about 12% in February to about $2.71/gallon. Unleaded Gasoline prices have been rising steadily since about Thanksgiving when the national average sat at about $2.11/gallon.
Real Estate Investment Trusts (REITs), which have struggled in the face of changing consumer habits due to the pandemic, found positive footing in February. REITS rose 2.72% as confidence in the economic recovery, positive vaccine news, and consumer data helped propel the asset class forward.
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February 2021 Market Review is intended solely to report on various investment views held by Fidelity Bank and is distributed for informational and educational purposes only and is not intended to constitute legal, tax, accounting, or investment advice. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. Fidelity Deposit & Discount Bank does not have any obligation to provide revised opinions in the event of changed circumstances. All data is provided by Bloomberg Finance, LP and Morningstar Direct. We believe the information provided here is reliable but should not be assumed to be accurate or complete. Data, if not otherwise noted, is as of 2/28/2021. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security. Past performance is no guarantee of future results. All investment strategies and investments involve risk of loss and nothing within this report should be construed as a guarantee of any specific outcome or profit. Investors should make their own investment decisions based on their specific investment objectives and financial circumstances and are encouraged to seek professional advice before making any decisions. Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. The S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large‐cap segment of the U.S. equities market.