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Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services

Market Performance Snapshot (Week ending February 26, 2021, Month of February 2021 and Year-to-Date) 

  • Dow Jones Industrial Average®:  -1.8% | +3.2% | +1.1%
  • S&P 500® Index:  -2.4% | +2.6% | +1.5%
  • NASDAQ Composite® Index:  -4.9% | +0.9% | +2.4%
  • Russell 2000® Index:  -2.9% | +6.1% | +11.5%
  • 10-year U.S. Treasury note yield: 1.41%
    - Up 7 basis points from 1.34% on February 19, 2021
    - Up 49 basis points from 0.92% on December 31, 2020
  • Best-performing S&P 500 sector this week: Energy, +4.5%
  • Weakest-performing S&P 500 sector this week: Utilities, -5.0%

    Past performance is not a guarantee of future results.

Markets buffeted by crosswinds

Equities experienced a choppy week, as rising Treasury yields raised concerns about inflation and stock valuations, while Federal Reserve Chairman Jerome Powell reiterated the central bank’s commitment to monetary stimulus and Congress moved forward with a $1.9 trillion fiscal stimulus plan.

  • Chairman Powell delivered his twice-yearly Congressional report on monetary policy during appearances before House and Senate committees. He confirmed the Federal Reserve’s outlook that while the U.S. economy is poised to grow in 2021, it “is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.”
  • While the official unemployment rate has fallen to 6.3%, Powell and Federal Reserve Governor Lael Brainard said the real unemployment rate is closer to 10%, after accounting for people who have stopped looking for work and other data issues.
  • As a result, Powell said the Federal Reserve will continue bond purchases and maintain the benchmark federal funds rate in the 0-0.25% range “until substantial further progress has been made” on reaching employment and inflation goals. He added that he wants to see “actual progress, not forecast progress” before adjusting the Federal Reserve’s policies.
  • Powell’s remarks temporarily calmed markets, which had grown jittery over the rising 10-year Treasury yield. Corporate and mortgage borrowing is tied to the 10-year yield, which has risen from less than 1% to 1.6% this year (before falling back to 1.4% by the end of the week). The U.S. has not been alone in seeing benchmark yields rising. German, Japanese, and British 10-year yields are all at or near 12-month highs.
  • Markets are trying to determine whether this is a positive sign of expected future economic growth, or a fearful signal that inflation could return more aggressively than previously expected. In his Congressional testimony, Powell said, “I really do not expect that we’ll be in a situation where inflation rises to troubling levels.”
  • Powell also signaled support for further fiscal policy measures, though he did not endorse any particular proposal. As of Friday’s market close, the House was preparing to move forward on President Biden’s $1.9 trillion stimulus plan. Markets have generally looked favorably on stimulus measures since the pandemic began.
  • Johnson & Johnson is poised to earn FDA emergency use authorization for its COVID-19 vaccine, which showed good results in clinical trials. This would be the third vaccine approved for use in the U.S., and the first to require only a single dose.

As the market turns

The first two months of 2021 have been marked by a cyclical rotation into energy, financial, and other stocks that are poised to do well from a return to economic growth and rising interest rates.

  • The energy sector is up nearly 26% year-to-date on lower oil supply, coupled with rising expectations for economic growth and more travel later this year. Financials are up 9.2% in 2021, helped by rising interest rates, which allow banks to earn more on loans.
  • The consumer staples sector, which consists of food, beverage, and other household product suppliers, and which performed well in 2020, has been negative in 2021. Utilities, often viewed as a defensive sector that generates stable dividends, are also negative year-to-date.
  • Small-cap value stocks have risen 14.8% so far this year, while large-cap growth stocks have delivered a -0.7% return. This is an important reversal from what we saw in the market last year.
  • It’s important to note that even amid the rotation toward cyclical stocks, technology stocks are about even year-to-date and the tech-heavy NASDAQ Composite Index is up 2.4%. Although below the torrid pace of 2020, investors still anticipate growth opportunities in technology, and some view tech as a potential hedge against virus resurgences that have kept normal life on hold for longer than expected.
  • Commodity prices have also risen, as investors look for assets that can generate returns and protect against inflation. So far in 2021, the Bloomberg Commodity Index®, which tracks energy, metals, and agricultural commodities, is up more than 9%. This year’s fast start comes off last year’s return of -3.1%.
  • The upshot is that some industries and sectors that lagged the market last year are making up ground in 2021, while others are taking a breather. This change in market leadership reinforces the maxim that diversification, while not a guarantee of future results, can help to provide balance to a portfolio.

Final thoughts for investors

Through the first two months of 2021, investors have shown an appetite for diversified equity holdings on the assumption that economic growth will advance this year. Rising bond yields also signal growth expectations. Yet, as Chairman Powell told Congress, “The economic recovery remains uneven and far from complete, and the path ahead is highly uncertain.” Speak with a financial professional about planning for uncertainty and staying on course toward your long-term goals.

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