U.S. Markets
Stocks notched a solid gain in February thanks to growing optimism surrounding the economic recovery and decreasing number of COVID-19 infections.
The Dow Jones Industrial Average led, picking up 3.17 percent. The Standard & Poor’s 500 Index rose 2.61 percent, while the Nasdaq Composite added 0.93 percent.[1]
Singular Focus
Investors focused on fundamentals during the month as the U.S. presidential election and a social media trading frenzy moved to the background.
Attention was centered on three key inputs: corporate earnings, economic data, and interest rates—all three of which influence longer-term stock valuations.
Corporate Earnings
With the fourth quarter earnings season coming to a close, 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 14.6 percent above estimates—substantially above the 6.3 percent five-year average.[2]
Communication Services and Information Technology were the sectors leading the reporting of positive earnings surprises. Real Estate, Energy, and Utilities lagged in beating earnings estimates.[3]
Economic Data
Economic strength was evident in 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.
Bond Yields
Treasury yields rose last month, with 10-year yields closing February at 1.46 percent and 30-year yields at 2.11 percent. Bond yields may increase for several reasons, some of which may be good (strong economic growth) and some concerning (accelerating inflation).[4]
One question that income-seeking advisors may ask is: “At what point do income-seeking investors move from stocks to higher-yielding bonds?” That query may be answered if the 10-year Treasury yield moves above the dividend yield on the S&P 500.
Sector Scorecard
Industry sectors were mixed in February, with Communication Services (+2.96 percent), Energy (+18.44 percent), Financials (+9.36 percent), Industrials (+4.15 percent), Materials (+0.69 percent), and Real Estate (+2.29 percent) advancing. Meanwhile, losses were felt in Consumer Discretionary (-6.00 percent), Consumer Staples (-2.10 percent), Health Care (-4.03 percent), Technology (-2.94 percent), and Utilities (-7.24 percent).[5]
What Investors May Be Talking About in March
Although the Fed remains committed to its zero-interest-rate policy, investors may be monitoring how the financial markets react to any pickup in inflation.[6]
Investors appear concerned about the Fed’s protracted easy monetary stance and federal fiscal spending in response to the pandemic.
For now, inflation remains within the Fed’s target range. However, expectations are rising, with the five-year forward expectations rate reaching a level not seen since 2019.[7]
World Markets
A pickup in global economic activity spurred international stocks higher, with the MSCI-EAFE Index climbing 5.16 percent.[8]
Broad gains were made in major European markets. France picked up 5.63 percent, Germany 2.63 percent, and the U.K. 1.19 percent.[9]
Stocks in the Pacific Rim markets also performed well, with solid numbers in Japan and Hong Kong. The Hang Seng index is up 6.42 percent year-to-date.[10]
Indicators
Gross Domestic Product: The nation’s economic growth for the fourth quarter was revised higher from 4.0 percent to 4.1 percent.[11]
Employment: The U.S. economy added 49,000 jobs in January, as continued weakness in the leisure and hospitality industry dragged down overall results. The unemployment rate fell to 6.3 percent due to the declining number of people looking for work.[12]
Retail Sales: Retail sales rose 5.3 percent, propelled by strong gains in home improvement, work-from-home (e.g., furniture and electronics), and spending in restaurants and bars.[13]
Industrial Production: Industrial production jumped 0.9 percent, with gains in manufacturing and mining offsetting a decline in utilities.[14]
Housing: Housing starts posted a disappointing 6.0 percent decline, as single-family home construction dropped 12.2 percent. However, a 10.4 percent rise in homebuilding permits suggested that the housing market remained healthy.[15]
Existing home sales edged 0.6 percent higher, as a limited supply of homes for sale drove a 14.1 percent price increase from a year earlier.[16]
New home sales rose 4.3 percent in January, the highest level in three months and above consensus estimates.[17]
Consumer Price Index: Inflation rose 0.3 percent to settle at 1.4 percent for the 12-month period, which ended in January.[18]
Durable Goods Orders: Orders for long-lasting goods rose 3.4 percent, marking the ninth straight month of increases and the most significant leap since July 2020.[19]
The Fed
Minutes from the last Federal Open Market Committee (FOMC) meeting indicate that the Fed reaffirmed its policy to keep short-term interest rates at current levels and continue its bond purchase program, citing uncertainty about the economy’s continued recovery.
While some Fed officials thought that near-term inflation might exceed its 2 percent target, they also believed that any price pressure would be short-lived.[20]
“At the Federal Reserve, we are strongly committed to achieving the monetary policy goals that Congress has given us: maximum employment and price stability,” Federal Reserve Chair Jerome Powell stated in his semiannual monetary policy report to the Congress.[21]
“Since the beginning of the pandemic, we have taken forceful actions to provide support and stability, to ensure that the recovery will be as strong as possible, and to limit lasting damage to households, businesses, and communities.”
| MARKET INDEX | Y-T-D CHG | February 2021 |
| DJIA | 3.17% | 1.06% |
| NASDAQ | 2.36% | 0.93% |
| S&P 500 | 1.47% | 2.61% |
| BOND YIELD | Y-T-D | February 2021 |
| 10 YR TREASURY | +0.54% | 1.46% |
Source: Yahoo Finance, February 28, 2021
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All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The MERVAL Index (MERcado de VALores, literally Stock Exchange) is the most important index of the Buenos Aires Stock Exchange. The MICEX 10 Index is an unweighted price index that tracks the ten most liquid Russian stocks listed on MICEX-RTS in Moscow. The BSE SENSEX (Bombay Stock Exchange Sensitive Index), also-called the BSE 30 (BOMBAY STOCK EXCHANGE) or simply the SENSEX, is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE). The Nifty 50 (NTFE 50) is a well-diversified 50-stock index accounting for 13 sectors of the Indian economy. It is used for a variety of purposes such as benchmarking fund portfolios, index-based derivatives and index funds. Established in January 1980, the All Ordinaries is the oldest index of shares in Australia. It is made up of the share prices for 500 of the largest companies listed on the Australian Securities Exchange. The MSCI World Index is a free-float weighted equity index that includes developed world markets and does not include emerging markets. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The Mexican Stock Exchange, commonly known as Mexican Bolsa, Mexbol, or BMV, is the only stock exchange in Mexico. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The DAX 30 is a Blue-Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The FTSEurofirst 300 Index comprises the 300 largest companies ranked by market capitalisation in the FTSE Developed Europe Index. The U.S. Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. 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Citations.
1. The Wall Street Journal, February 28, 2021
2. FactSet Research, February 19, 2021
3. FactSet Research, February 19, 2021. “Earnings Insights”
4. U.S. Department of the Treasury, February 2021
5. SectorSpdr.com, February 28, 2021
6. The Wall Street Journal, February 24, 2021
7. Fred.StLouisFed.org, February 2021
8. MSCI.com, February 28, 2021
9. MSCI.com, February 28, 2021
10. MSCI.com, February 28, 2021
11. CNBC.com, February 25, 2021
12. The Wall Street Journal, February 5, 2021
13. The Wall Street Journal, February 13, 2021
14. FederalReserve.gov, February 17, 2021
15. CNBC.com, February 18, 2021
16. The Wall Street Journal, February 19, 2021
17. Bloomberg.com, February 24, 2021
18. CNBC.com, February 10, 2021
19. The Wall Street Journal, February 25, 2021
20. The Wall Street Journal, February 17, 2021
21. FederalReserve.gov, February 23, 2021