Market Outlook for March 2021
Some serious volatility to start the month
Growth stocks, small-cap and tech have struggled with higher rates
Economic data continues to point to very strong growth
Covid numbers continue to improve
Volatility in equites as rates continue to rise
February saw S&P up about 1.7% and the first trading day of March added another 2.4% on top of that. Then markets suffered three straight negative days and with losses of about 3.4%. The selloff was primarily driven by concerns over rapidly rising interest rates as the US 10-year treasury yield rose to about 1.6%, over a percent higher than the historic low set in August 2020. While a 10-year yield of 1.6% is not very high, the pace of the rise has roiled markets. Policy makers at U.S. Federal Reserve do not seem to be concerned about the spike in rates, which has added to volatility. In the long run, higher rates, especially paired with a steeper yield curve, are an indication of stronger economic growth.
Yields generally fall during times of market weakness and the current dynamic of higher U.S. treasury yields and lower stocks is, in our opinion, inherently unsustainable. However, even if when short-lived, pullbacks in which treasury bonds and stocks are positively correlated can be quite uncomfortable, as the only place to hide is in cash. iShares 20+ Year Treasury ETF (TLT) usually functions as a very strong hedge against stock market declines but fell about 1.7% in the selloff. Luckily, Friday brought an end to the three-day losing streak, but again brought high volatility and a big intra-day swing from strong losses mid-day to solid gains by the close.
Economic data continues to look good; Covid cases rapidly declining
February saw 379k jobs added to the U.S. economy, well ahead of the consensus estimate of 179k jobs. Housing, manufacturing, and retail sales data were also quite strong over the past month. The Atlanta Fed’s GDP Now offers a very timely “nowcast” of GDP that is updated daily. The model currently shows Q1 GDP growth of 8.3%. Economic data certainly offers justification for higher yields.
News on the Covid-19 front is also quite good. The U.S. is currently vaccinating about 2 million people a day. New cases continue to decline at a rapid pace and hospitalizations along with them. The pace of improvement is likely to slow as states begin to lift restrictions, but with the number of vaccinations being administered and the targeting of at-risk populations, we would expect hospitalizations to continue to improve, even if new cases remain high. As long as progress continues with hospitalizations, states will continue to lift restrictions. A major risk to the progress is the B117 Covid variant that is considerably more contagious than other strands of the virus. In Florida, where the B117 has its strongest foothold, progress in new cases has completely stalled and the state may actually see a rise in cases in the near term. However, given the pace of vaccinations, the impact from B117 will likely be contained and only serve to slow progress, not stop it.
Covid concerns are likely to fade quickly in the U.S. and the country looks well on pace to be back to normal by mid-summer or early autumn. The picture overseas is far more mixed. The vaccination programs of most European countries is underwhelming to say the least. Although the U.K. has made tremendous progress comparable to the U.S., Germany has been especially disappointing with no notable acceleration in daily vaccinations since early January.
Where do we go from here?
It has been a volatile week and with the run-up we have seen over the past year, we could easily see more selling action. However, the economy remains quite strong. Covid vaccinations are continuing at an impressive clip, and despite it being the epicenter of the volatility, the treasuries market is actually pointing toward stronger growth. Overall, we think this choppiness will be short lived and any pullback would probably be fairly shallow. Fundamentally, we think the bull-market remains firmly intact, but would not be shocked to see further bouts of volatility.
What should I do?
Selloffs happen, but with strong fundamentals it is not prudent to dramatically reduce risk in reaction to the market. This is because finding the right time to re-enter is very difficult and missing the bounce off the bottom by even a relatively short time is usually worse than riding out the pullback. It’s also important to not overly focus on the short-term. There were a bad few days, but the S&P is up about 29% over the past year and that includes the much more severe 26% pullback from 3/5/2020 to 3/20/2020. At Adams Wealth we actively manage portfolios and will reduce risk when warranted by a change in our forward-looking outlook and that did not change with the week’s volatility. Being reactionary and/or overly emotional in periods of volatility is not a recipe for long-term success.
– Cormac Murphy, CFA – Chief Investment Officer & Director Of Research
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