Fidelity Bank - Wealth Management
March 2021 Market Review
As the first quarter comes to an end the three R’s have taken center stage: the Race to vaccinate, Rising interest rates, and the Reopening of the economy. At the end of March, more than 150,000,000 doses of vaccine have been delivered into arms. The President has targeted May 1st as the date that all Americans should be eligible for a vaccine. Government stimuli, solid economic data and rising inflation data have pushed longer term treasury rates higher. 10-to-30-year rates all moved higher by more than 25 basis points in March. Year-to-date those maturities are all higher by more than 75 basis points. The jobs report published on April 2nd second showed employers added 916,000 workers to payrolls in March. This was the third straight month of higher payroll numbers and demonstrates promise of an economic recovery. For March, the S&P 500 gained 4.38% while the Bloomberg Barclays US Aggregate Bond Index lost 1.25%. Year-to-date the S&P 500 is up 6.17% while the Bloomberg Barclays US Aggregate Bond Index is down 3.37%.
As noted above, the jobs report posted a monthly net gain of more than 900,000. That gain helped move the unemployment down to 6%. As employers have gained confidence in the economic recovery, payrolls have picked up, as have PMI readings. Institute of Supply Management PMI surveys, which tracks sentiment among purchasing managers at manufacturing, construction and/or services firms, rocketed higher in March to 64.7, signaling additional confidence in the economic rebound. A PMI reading above 50 indicates expansion, while below 50 indicates contraction. 64.7 is the highest ISM PMI survey reading since December 1983.
Value stocks across market cap led the way in the first quarter with large Value up 11.26% and Small Cap Growth up 21.17%. Large Cap Value beat Large Cap Growth by 10.32% and Small Value beat Small Growth by 16.29. In March, from a factor perspective, those stocks that identify most with the “value factor” outperformed those with the least value factor exposure by more than 17%. 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.
All 11Global Industry Classification (GIC) sectors were positive in March. Industrials, Consumer Staples, and Materials were the leaders 8.91%, 8.30%, and 7.60%, respectively. For the quarter, Energy gained 30.70% and Financials posted a nearly 16% gain. Unsurprisingly, Technology trailed on a monthly and quarterly basis.
Treasury rates rallied in the 1st quarter, putting upward pressure on the dollar. The dollar rose against both developed and emerging market currencies in the 1st quarter of 2021. The strengthening US Dollar the depressed returns for US investors in both international developed and emerging markets. For the quarter, the MSCI EAFE index gained 7.59% in local currency terms but only gained 3.48% in US Dollar terms. A similar story played out in Emerging Markets; the MSCI Emerging Markets Index gained 3.96% in local currency and the conversion to US Dollars decreased that gain to 2.29% for US investors.
As market inflation expectations continued to rise in the first quarter, traders and investors priced in a stronger economic recovery. Pressure has been mounting on longer term interest rates, which have been rising steadily since August. In the first quarter alone, longer term Treasury rates increase by nearly 75 basis points. 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 March, ten-year market implied inflation stood above the Fed’s target at 2.37%.
The yield curve continues to get steeper as short-term rates(1M -1Y) have drifted lower, while longer term rates (2Y-30Y) have shot higher since their lows in August 2020. In the first quarter, 5 Year to 30 Year rates moved higher by an average of 76.4 basis points! The 10 Year rate eclipsed 1.77% during intraday trading on 3/30. Rising rates dropped Treasury prices by 4.25% and TIPS fell by 1.47% in the first quarter of 2021.
The Bloomberg Commodities Index posted a strong quarterly return of 6.92% as rising inflation expectations, winter weather, and increased demand boosted prices. Energy Products, Livestock, and Industrial Metals led the way in advancing 17.32%, 10.44%, and 7.49%, respectively. Gold, which is often characterized as a real, long duration asset, struggled in the first quarter as rates rose losing around 9.5%.
Consumers are likely seeing their wallet feel a bit lighter after visiting the gas station. Regular Unleaded Gasoline rose by about 29% in the first quarter to about $2.88/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) posted a strong first quarter return of 8.32%. REITS, which have struggled as a result of the pandemic, rose 5.53% in March as confidence in the economic recovery, positive vaccine news, and consumer data helped propel the asset class forward.
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March 2021 Market Review is intended solely to report on various investment views held by Fidelity Deposit & Discount 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 3/31/2021. 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.