Friday, February 19, 2021
US and International Equities
The major market indexes ended this week mixed with the Dow Jones Industrials as the only major average higher. Results were mixed outside the United States as well, with both the MSCI EAFE and Emerging Markets (EM) indexes posting mixed results. After a very strong start to the New Year, the Russell 2000 Small Cap Index lost the most ground of all the major averages this week.
Energy Continues Propelling 2021 Results along with Financials
The energy sector, which started its rebound during the fourth quarter of last year and continues to lead all sectors as 2021’s top performer, continued its winning ways returning over 2% this week. The global demand outlook has improved as the COVID-19 vaccine rollout has picked up speed recently and we get closer to a fully reopened economy.
Financials also had a strong week, returning over 2%, bringing the sector’s year-to-date return to a solid 9.8%. Financials have been beneficiaries of both strong equity and credit markets along with rising interest rates and a steepening of the yield curve. In addition, as the economy rebounds, the financial sector should feel some of those tailwinds.
The major detractors this week were health care and information technology. In addition, for the second week in a row, the utilities sector was also a laggard, finishing the week over 1% lower.
Earnings, Earnings, Earnings
One major factor influencing markets recently is fourth quarter earnings season. With more than 80 percent of the S&P 500 Index constituents having reported results, the index’s earnings growth for the fourth quarter 2020 is tracking to a more than 3% year-over-year increase. This is roughly 12 percentage points above estimates set on January 1, 2021.
The sectors seeing the biggest upside surprises include communication services, consumer discretionary, and financials. Forward 12 months’ estimates have impressively increased about 4% year to date since earnings season began.
Japan’s Nikkei tops 30,000
The Japanese Nikkei recently topped the 30,000 mark. This is the first time that the Japanese headline index has seen that level in over 30 years. That being said, the Nikkei still has a ways to go in order to reach its all-time closing high of 38,915.87, which it achieved on December 29, 1989.
Fixed Income Recap
Bonds, as represented by the Bloomberg Barclays US Aggregate, lost ground this week as the 10-year Treasury yield moved higher. Many other bond sectors also moved in tandem, as investors took profits from last week’s rally. Even with this week’s pullback, high yield municipal bonds, as represented by the Bloomberg Barclays High Yield Municipal Index, continue to be a bright spot in 2021, returning almost 2.5%.
Oil Fuels Higher
West Texas Intermediate crude oil (WTI) propelled above $60 this week. There are many reasons for this commodity’s recent rise.
- Historically cold weather in Texas has limited overall US production by approximately one-third.
- Global demand from India and China are quickly improving, while OPEC production cuts from last year are still in play.
Recently, LPL Research has grown more optimistic on both crude oil and the energy sector based upon both fundamental and technical analysis.
Natural Gas Gains Traction While Gold Loses Some Luster
As mentioned above, oil had a positive week. This along with colder temperatures across the nation helped propel natural gas higher by over 6% this week. Gold, which was a strong performer during COVID-19’s genesis, turned negative this week as well as for the year.
US and Global Economic Data Recap
More Global Growth Progress
Based on the Citi Economic Surprise Indexes, economic data over the last three months in the major developed economies has, for the most part, exceeded expectations.
- The positive US reading at just over 50—though down from summer 2020 highs of over 200—is impressive amid rising expectations.
- Even stronger readings in Europe as well as the United Kingdom suggest expectations may have finally been lowered enough to achieve. This being said, given LPL Research and Bloomberg’s consensus forecasts, economic growth in Europe is still expected to lag the United States this year.
- Expectations for economic data in Japan have been closest to expectations since the global recovery began. Japan’s surprise index is in line with the US at 52.
The Federal Reserve Minutes
Federal Reserve (Fed) officials expressed marginal concern that sustained inflationary pressures are culminating based upon the most recent Fed minutes. Much of the focus is on the considerable amount of slack remaining in the economy, despite the improved outlook. The present Fed policy focus remains on the longevity of asset purchases.
Retail Sales Stage a Solid Rebound
US retail sales rose over 5% month over month in January according to the US Census Bureau. This was ahead of the Bloomberg consensus forecasts by more than 4 percentage points. The surge in retail sales was the highest in seven months. This was a strong response following December’s retail sales decline as fresh stimulus checks helped spur consumer demand following the headwinds caused by rising COVID-19 cases late last year. Moreover, January’s retail sales results should remove much of the risk for the US economy to stall during the first quarter of this year.
Housing Continues to Look Strong
The National Association of Home Builders (NAHB) Housing Market Index (HMI) for January increased from December, showing that homebuilders are still quite positive on the outlook for the housing market. Home buyers appear undeterred in the midst of lumber price increases along with increases in building material costs due to supply-chain challenges.
Jobless claims continue to tick higher
According to the US Department of Labor, weekly claims for unemployment insurance were higher than expected at over 860,000 compared with the Bloomberg forecasts near 770,000. Filings from the prior week were also revised higher by over 50,000, while continuing claims fell to under 4.5 million versus 4.54 the week prior. The continuing volatility in the labor market shows that while the outlook for the economy is improving, weakness in the labor force is persisting.
Next week, the following economic data is slated to be released:
- On Tuesday, we get February data on Consumer Confidence and the December Federal Housing Finance Agency (FHFA) Home Price Index.
- Wednesday is all about January building permits and the new home sales from the US Census Bureau.
- Thursday provides investors with another weekly initial unemployment claims report. In addition, we receive details on January pending home sales, durable orders, and revised Q4 GDP.
- On Friday, we get January’s personal income and consumption data along with wholesale inventories and February Sentiment from the University of Michigan.
Next week, as we head toward the end of fourth quarter earnings season, we have over 50 companies reporting earnings results and hosting conference calls.
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