Weekly Market Performance – Energy Surges Amid Inflation Fears

Market Blog

Friday, March 5, 2021

Index Performance

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US and International Equities

Markets were mixed this week. The Nasdaq Composite index was the worst performer, pulling back over 2% this week. For the second week in a row, the Dow Jones Industrial Average held up best, and was up over 1%. In addition, both the developed and emerging market equity markets gained ground this week.

Energy Powers Forward For a Second Straight Week

A major theme this year has been the rebound in the energy sector. The sector began its ascent during the fourth quarter of last year and continues to lead all sectors as 2021’s top performer. Even in the wake of a tough week for the markets, energy managed to return over 9%. The global demand outlook has improved as the COVID-19 vaccine rollout has picked up speed and we get closer to a fully reopened economy.

Currently, the S&P Energy Sector is trading at 30% above its 200-day moving average.  This is the most ever for the sector, using data back to 1990.

“The case can be made that energy could be a bit stretched in the near-term, but momentum often breeds more momentum,” added LPL Financial Chief Market Strategist Ryan Detrick. “Energy has been unloved for quite some time, but we may be in the early innings of a larger rally for the sector as the global economy continues to improve.”

Please read the LPL Research blog post Historic Surge for the Energy Sector for more of our thoughts concerning the energy sector.

Financials have benefitted from the steepening yield curve along with the prospects for reopening of the economy.  This sector has returned a solid 14% this year, as well as over 4% this week.

For the second week in a row, the major detractors were the consumer discretionary and information technology sectors. In addition, real estate had a tough showing. All three sectors are trailing the broad market this year.

Fixed Income Recap

Bonds, as represented by the Bloomberg Barclays US Aggregate, lost ground for a third straight week as the 10-year Treasury yield moved higher. Many other bond sectors also moved in tandem, as investors anticipated an economic recovery with higher rates.  Municipal bonds, as denoted by the Bloomberg Barclays Municipal Bond Index, rebounded marginally.

US Interest Rates Continue to Climb

The 10-Year Treasury yield is up 50 basis points (0.50%) through February 2021 and up 80 basis points (.80%) from recent lows. Core fixed income returns are off to their worst start ever and recent interest rate volatility is above the historical average. In addition, yields have reflected a re-pricing for both higher inflation and higher growth expectations.  LPL Research still expects higher rates throughout the rest of the year around 1.75%, the upper end of our year-end 2021 yield forecast range.

Interest Rates and the Dollar in Perspective

Even though US interest rates increased in February and the dollar devalued over the past eight months, the US 10-year Treasury is yielding below where it was prior to the start of the COVID-19 pandemic.  Looking at other 10-year sovereign debt, most rates are back above their pre-COVID-19 levels.  Given there has been some discussion concerning lofty US debt levels along with the devaluation of the dollar, the comparative 10-year yield should provide some pause to those concerns.

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Oil Powers Forward For a Second Week in a Row

As mentioned previously, oil finished the week higher while natural gas sold off after strong performances during past weeks. Colder weather across the country helped fuel the rise in natural gas. In addition, all major metals sold off this week.

US and Global Economic Data Recap

Fed Speak

Given the rise in Treasury yields, Federal Reserve (Fed) Chair Jerome Powell added he would be concerned with disorderly markets or a tightening of financial conditions that could threaten the path of the current economic recovery. Despite comments indicating that the Fed is a long way from pulling support from the economy, bond markets seemed bewildered by how the Fed might manage the rise in long-term rates. In addition, Chairman Powell did not comment on the possible resurrection of “operation twist” in which the Fed would lighten its holdings of short-term bonds to purchase more on the long side of the curve.

US Manufacturing Solid

The ISM’s manufacturing Purchasing Managers’ Index (PMI) was reported last month to be above the median estimate of over 58 which indicates expansion.  This was the highest in three years; however, Manufacturing firms are now having challenges meeting demand with order backlogs reaching their highest levels since 2004. Adding to inflation concerns, it was reported that higher commodity prices and supply chain disruptions pushed the prices paid to the highest level since 2008.

Global Manufacturing Continue To Expand

The global manufacturing Purchasing Managers Index (PMI) rose in February to a solidly expansionary level that it hasn’t reached in three years.  Among the major economies, manufacturing PMIs for the Eurozone, United Kingdom, Brazil, Russia, and Japan all increased but China edged lower. Lengthening supplier delivery times and supply shortages—including semiconductors—pushed prices higher but this will likely prove to be temporary.

February’s Job Report

The US economy gained over 370,000 jobs in February according to the US Bureau of Labor Statistics.  This exceeded the Bloomberg survey estimates of a 200,000 gain, aided by seasonal adjustments and paired with strong revisions to January numbers. The unemployment rate fell to 6.2% and was paired with an unchanged labor force participation rate.

Weekly Jobless Claims Edge Estimates

The Department of Labor reported that under 750,000 Americans filed for unemployment insurance last week.  This was below the FactSet consensus estimate, but slightly higher than the prior week’s 730,000. Continuing claims were also marginally lower than estimates, with just under 4.3 million Americans remaining on unemployment insurance.

Next week, the following economic data is slated to be released:

  • On Monday, we get the final calculation of January’s Wholesale Inventories.
  • On Tuesday, February’s National Federation of Independent Business (NFIB) Small Business Index will be published.
  • Wednesday is all about February’s Consumer Price Index (CPI), hourly earnings, and average workweek statistics. In addition, last month’s Treasury Budget will be reported.
  • Thursday provides investors with another weekly initial unemployment claims report. In addition, the US Bureau of Labor Statistics Job Openings and Labor Turnover Survey (JOLTS) January job openings are published.
  • On Friday, the Michigan Consumer Sentiment Index along with February’s Producer Price Index (PPI) will be published.



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