March 2, 2021
During the final week of February bond markets experienced a large selloff causing yields to spike and in turn gave equity markets a jolt. The benchmark 10-year Treasury yield soared to a one-year high of 1.614% before finishing the month at 1.41%1, prompting investors concerned about rich valuations to lock in profits on some high-flying growth stocks. When the yield on Treasuries rises above the S&P 500 dividend yield it removes the stock market's yield advantage. Although the S&P 500 estimated dividend for February stands at 1.52%2, above the month-closing yield of the 10-year note, Treasury yields spiked so quickly during the second half of the month that all of the sudden investors seeking yield were quickly reminded that risk free Treasuries can be very competitive with stocks in such an environment.
During the final two weeks of February, we witnessed a flight-to-quality as investors moved into blue chips and out of the high growth tech giants. For the month, the Tech heavy NASDAQ Composite Index lost -1.5% while the flight-to-quality blue chip names which compose the Dow Jones Industrial Average index were up 2.65%. The NASDAQ hit a peak on the 12th of the month, but since that peak through the end of the month the NASDAQ declined by more than -6%. This could be just a temporary shift in sentiment, or it may be an early sign of a more prolonged shift. We will have to wait to see how this plays out. Growing inflation concerns are also playing a role in the markets as prices are rising and projected U.S. inflation for 2021 is 2.24% which is on-track to be the highest rate since 2018.3 Metals, including iron ore and copper have gotten more expensive as have commodities like fuel, cotton, and lumber.
Since these are purchased by manufacturers to make other products it puts upward pressure on a broader range of goods. This pressure, combined with pandemic-fueled supply chain disruption, means we now have the first legitimate signs for inflation concerns in quite some time. Some inflation is good but with high unemployment, as well as high under-employment, an overshoot of inflation could be painful to companies’ growth multiples.
There is still strong support for equities with potential additional stimulus being considered on Capitol Hill, and the Federal Reserve’s continuing to maintain its extraordinarily accommodative monetary policy. The Fed has indicated it would allow inflation to run above its 2% target so we don’t expect an immediate reaction from the Fed to deviate from its current monetary policy framework.
It will be interesting to see how the market digests the new higher yields. It is quite possible that once the profit takers are done stock prices could resume their climb higher. However, it is also possible that the sentiment may not fully rebound. For now we must wait and see while we watch for additional signs of market risk.
As we entered February both our long term & shorter term technical models were in positive territory, but the weak market price action over the final couple weeks of the month combined with increased volatility caused some of our faster moving trend measures to turn off signaling for reduced equity exposure. The Longer term technical model still remains positive and the long term trend remains in place. The price on the NASDAQ dropped below its 50-day moving average, but the S&P looks to be bouncing off its 50-day moving average. Sometimes these average levels can act as support levels. If that support holds and stocks rebound, then our faster moving trend measures should quickly react in a positive manner.
Brad Thompson, CFA
Chief Investment Officer
Published February 26, 2021; Accessed March 1, 2021.
Accessed March 1, 2021
Accessed March 1, 2021
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies.
The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.
The dividend yield for the S&P 500 is calculated by finding the weighted average of each listed company's most recently reported full-year dividend, then dividing by the current share price. Yields are published and calculated daily by Standard & Poor's and other financial media.
The 10-year Treasury note is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.
Flight-to-quality is the action of investors moving their capital away from riskier investments to safer ones.
The 50-day moving average is the average closing price of a security across the most previous 50 days.
There are certain limitations to technical analysis research, such as the calculation results being impacted by changes in security price during periods of market volatility. Technical measurements are one of many indicators that may be used to analyze market data for investing purposes and should not be considered a guaranteed prediction of market activity.
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