February 2021 Stock Market Commentary
Ethan Pollard | March 04 2021
Equity markets advanced in February after a rocky start to the year, with improving economic data buoying investor sentiment despite inflation fears returning to the headlines. The S&P 500, a benchmark for large cap US stocks, gained +2.8% on the month to move back into positive territory on the year. Smaller company stocks, which were hit harder by the pandemic, continued their recovery by gaining +6.2% in February for a 11.6% gain year-to-date per the Russell 2000 index.
Overseas equities advanced +2.0% this month, with the MSCI ACWI ex-US index now up +2.2% on the year. Bond markets continued to sell off, with the Barclays Aggregate Bond index declining another -1.4% in February for a -2.2% return YTD. 10-year Treasury rates briefly topped 1.5% for the first time in a year, as investors start to price in the potential for rising inflation on the back of continued stimulus alongside an improving economy. Gold prices resumed their consolidation, falling -6.5% for the month (-7.7% YTD).
With COVID concerns fading from the headlines as news continues to improve regarding the efficacy and distribution of the various vaccines, we turn to the data for an idea to what to expect for the rest of 2021. Below is a recap of our firm’s propriety Three Dials framework, which parses the relevant figures to help shape our asset allocation decisions. Each of our dials was unchanged during the month of February:
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- Market Sentiment and Momentum: Positive
For the second consecutive month, equity markets experienced a strong first half followed by weakness to close out the month. Volatility is likely to remain elevated as the recovery continues in fits and starts. That said, technical indicators point toward a continued uptrend in stocks, leaving our Momentum Dial in a “Positive” position.
- Economic Fundamentals: Positive
The global economic recovery continues, as the Q4 GDP number for the US was revised upwards and estimates for 2021 are coming in around a +4.5% real growth rate. An increase in vaccination rates should have a direct impact on economic growth, and supportive fiscal policy has helped stem the fallout from increased unemployment. Overall, improving leading indicators leave our Fundamental Dial with a “Positive” reading.
- Valuation: Negative
Valuation remains a moderating force for us, as certain areas of the market have begun to exhibit bubble-like behavior. For instance, 2021 has seen a flood of new (largely unsophisticated) buyers entering the market to chase returns, thus pushing up equity prices to potentially unsustainable levels. While we are not calling for an imminent crash, we simply see the risks in this area as being elevated, which places our Valuation Dial in a “Negative” position.
On balance, our Three Dials composite reading continues to take a “Cautiously Optimistic” view, as strong showings in the areas of Momentum and Economic Fundamentals are balanced by Valuation concerns.
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Sources: Morningstar, Bureau of Economic Analysis, IMF, Bridegewater, Federal Reserve of Philadelphia
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