Week of March 15, 2021
Another volatile week in the U.S. equity markets produced solid gains in the Dow and S&P 500, as well as the NASDAQ. On the week, the Dow and S&P 500 gained 3.47% and 2.6%, respectively, while the NASDAQ rose 3.28%. It is a very different story for the first two weeks of March, with the Dow and S&P 500 gaining 6% and 3.5%, with the NASDAQ gaining less than 1%.
Some sectors of the stock market have benefited from the outlook of the economy returning to full capacity in the future such as airlines and consumer discretionary (GAP, for example). Also providing a tailwind for the markets is the passing of the $1.9T stimulus package signed by President Biden last week. Of that $1.9T, almost $20 billion will go directly to COVID-19 vaccinations.
Hampering other segments of the stock market, namely technology, are higher interest rates measured by the yield on the 10-year Treasury. The low of February 2020 hit 0.55% on the 10-year note, found a high last Friday of 1.642%. “Investors will have to continually grapple with the anxiety about economic overheating and Fed tightening that has gripped the markets in recent weeks,” wrote David Kostin, Goldman’s chief equity strategist. “We believe equity valuations should be able to digest 10-year yields of roughly 2% without much difficulty.
This jump in bond yields has challenged growth stocks in recent weeks and sent investors into cyclical pockets of the market and away from the technology sector that has significantly outperformed over the last year. This rotation from growth to value stocks as financials and energy, for example, have outpaced technology for the first time in the last few years.
Investors are watching the meeting Wednesday of the Federal Open Market Committee (FOMC) to see the Fed’s decision on interest rates. The FOMC is expected to acknowledge much better growth in the economy. Bond investors are also watching to see whether the Fed will change their interest rate outlook, which now does not include any rates hikes through 2023.