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Investing

What are markets telling us?

Markets seem to be sending three messages so far this year. What should you be doing about it?


 

Our Top Market Takeaways for March 5, 2021.

Market roundup

Who said what?

Three policymakers said things this week that are important for financial markets and the economy.

  1. President Joe Biden announced that the United States would have enough COVID-19 vaccines to inoculate every adult by the end of May. We have been more optimistic on vaccine-driven progress since the start of February. In a sure sign that a travel boom is coming, travel influencers are some of the hottest pages on Instagram, people over 75 are back on airplanes, and spending in ski towns and theme parks is rising.1
  2. OPEC+ agreed to keep crude oil production at current levels even though, as hinted in the above, global demand for oil is set to recover substantially. This took the market by surprise. Both Brent and WTI oil surged over +4.5% on the day of the announcement, and are up over +20% over the last month. Global energy stocks have rallied +15%, and U.S. oil and gas exploration and production companies have tacked on another +20% to their monster rally since the U.S. elections and Pfizer announcement (they have doubled!).
  3. Finally, Jerome Powell said that the Fed was a “long way” from its goals of maximum employment and consumer price inflation at an average of 2%, but it’s what he didn’t say that caused some angst. Markets were looking for some pushback against the recent rise in interest rates that seems to be at odds with the Fed’s “lower for longer” approach. Treasury yields rose at all maturities, and the 2-year–10-year yield curve (a good proxy for markets’ expectations for future growth and inflation) is at its steepest level in five years.

 

Spotlight

Three takeaways from the market reaction

  1. Stock markets really seemed to want some coddling from Chair Powell. If he had put more effort into pushing back on rising interest rates, it probably would have stemmed the declines for some of the high-flying, low-profit companies that benefit most from low interest rates. The ARKK Innovation ETF, which has lost ~25% since the middle of February, is probably the best proxy for this type of asset.2 Clean energy (-25%), SPACs (-23%) and small cap tech (-15%) are also good examples. On the bright side, this takes some of the exuberance out of pockets of markets that were getting flagged as bubbles a few weeks ago.
  2. It seems clear that markets are moving on from the pandemic. Last April, we wrote that a stay-at-home environment would probably benefit technology, and that it posed problems for energy and financials. Today, the market has the complete opposite view. Year-to-date, the S&P 500 energy sector is up +33% and the financials sector is up +12%, while the tech sector is down -3%. Over the last month, global airline stocks are up +16% and hotel and cruise line stocks are up +22%. Consumer staples (remember toilet paper hoarding?) are down over -7%.
  3. The market has not valued “safety” this year. Last year, the market put a premium on assets that were deemed “safe.” Gold gained almost +25%. The biggest stocks outperformed the smaller stocks. Investment grade bonds beat high yield bonds. This year, long-term Treasury bonds and gold have both lost over -11%, while copper (which stands to benefit from the cyclical recovery and transition to next-generation vehicles) has gained +12.5%. Safe haven currencies such as the Swiss franc and Japanese yen are down over -4% versus the dollar. Utilities are the worst-performing sector in the S&P 500.       

 

Conclusion

What should investors consider doing?

The message from markets seems clear.

  1. Growth is set to surge in the United States and globally.
  2. Vaccination progress and the collapse in case growth mean that the end of the pandemic impacting our day-to-day lives is close at hand.
  3. The Federal Reserve is still accommodative, but the next move is probably to start reducing the amount of support, not delivering more.

What that means:

  1. Assets that do well during periods of accelerating growth (such as bank stocks, emerging markets, and industrial and energy commodities) will probably continue to rally. Defensive assets look least attractive at the moment.
  2. Stocks that are levered to travel and mobility will likely benefit from pent-up demand.
  3. Low-profit, long-term growth companies could face headwinds from the interest rate environment in the near term, and core fixed income will likely continue to be challenged.    

So you should consider:

  1. Balancing exposure to the megatrends of digital transformation, healthcare innovation or sustainability with exposure to companies set to benefit most from the surge in growth that is starting to happen right now (we are doing this in the portfolios we manage). If you don’t have exposure to megatrends, now could be a good time to start selectively adding.
  2. Adding travel-related names as a tactical opportunity.
  3. Assessing your fixed income allocation to make sure that it is still designed to deliver the protection and/or income needed to meet your goals.  

 

1.BofA Global Research
2.ARK Innovation ETF is an actively managed exchange-traded fund that seeks to invest in equity securities of companies relevant to the theme of disruptive innovation including companies involved in the development of new products or services, technological improvements and advancements in scientific research.

 

 

 

 

All market and economic data as of March 2021 and sourced from Bloomberg and FactSet unless otherwise stated.

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