March Market Insights – The Industrials Emerge

Market Blog

Friday, April 1, 2021

Index Performance

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U.S. and International Equities

This month provided positive results for the U.S. major market indexes. The top performer was the Dow Jones Industrial Average, returning over 7% for the month. The NASDAQ Composite was the worst performer this month, gaining only a fraction. The international developed and emerging markets, as denoted by the Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) and Emerging Markets (EM) indexes, finished the month mixed.

Industrials Show Strength

Given the efficacy of the COVID-19 vaccination progress along with the economic reopening efforts, the industrials and utilities led March. The sector that did well during the pandemic, but the “stay at home” sector and information technology, reversed course and lagged the S&P 500 Index this month.

Stock valuations are higher globally 

The S&P 500 forward price-to-earnings ratio (PE) at over 21 is presently 35% above its 10-year average. When looking at the developed overseas markets, the PE for the MSCI EAFE Index is 17, which is 23% above its long-term average. In addition, the story for emerging markets (EM) equities is the same, with the MSCI Emerging Markets (EM) Index PE over 14. This is 27% above its long-term average. Despite the recent rise in interest rates, LPL Research continues to believe low interest rate levels support elevated valuations globally.

February’s Fixed Income Results

The benchmark Bloomberg Barclays U.S. Aggregate Index finished the month lower, as rising Treasury yields continue to pressure bond returns in 2021. Municipal high yield, as denoted by the Bloomberg Barclays High Yield Municipal index, was a bright spot in March, returning over 1% for the month, aided by tailwinds from provisions in the fiscal stimulus package that included aid to state and local governments

International bonds, denoted by the Financial Times Stock Exchange (FTSE) World Government Bond Index, and emerging markets debt, measured by the JP Morgan Emerging Markets Bond Index (EMBI), ended the month lower as rising bond yields were not limited to the US.

“March was another month with wide divergence between equity and bond market performance,” explained LPL Research Senior Vice President and Director of Research Marc Zabicki.  “While we do believe equity markets will perform well through 2021, the persistent disparity in bond and stock returns does have us on the lookout for some near-term reversion to the mean.”

Commodities Cool in March

Commodities sold off during March. Silver and natural gas both gave back over 5% this month, erasing their February gains. In addition, gold ended the month lower and is down over 9% year-to-date despite rising inflation expectations. Oil, which has been this year’s top performing commodity, pulled back over 3% in March.

U.S. Economic Data Recap

Inflation: Higher gasoline prices fueled both consumer and producer prices for January and February. However, accounting for volatile food and gas prices, inflation rose slightly in February, with the core Consumer Price Index increasing only marginally from January. February’s core Consumer Price Index increased over 1% year over year.

February producer prices, measured by the core Producer Price Index (PPI), increased the most since December 2009. Year over year, the February PPI increased over 2%. Inflation has risen slowly from the low levels seen in 2020 and should begin to normalize—although we believe any inflationary pressure will ultimately prove transitory.

U.S. Consumer:  The Conference Board’s Consumer Confidence Index surged in March to its highest reading since the onset of COVID-19. The Present Situations Index also grew, reflecting the COVID-19 economic recovery.

The University of Michigan consumer sentiment survey for March increased 8% to the highest level in a year. However, it is about 7% below pre-pandemic level. The government stimulus is credited for the increase in both consumer confidence measures.

Retail Sales: Following a strong January, February retail sales fell 3% month over month. This was below consensus. COVID-19 along with the severe winter storm could be seen as impacting retail sales last month.

U.S. Home Sales: Sales of new homes in February fell over 15%; however, they remained higher compared to a year ago. Last month’s home sales were up over 14% versus a year earlier. The weather was the primary culprit for the drop in home sales last month. Higher rates could also be a cause, but given tight inventories and demographics, the market should remain solid going forward.

Small Business Sentiment: The National Federation of Independent Business (NFIB) Small Business Optimism Index rose modestly in February, however it sits below its 47-year average of 98 for the second month in a row. The NFIB report showed some concern about a tightening job market and anticipation of increased price pressures, both signs of a recovering economy but also potentially new challenges. At the same time, muted sales and profit growth expectations limited the overall index’s improvement.

Federal Reserve (Fed) News:  The Federal Open Market Committee (FOMC) voted to keep interest rates near zero and to continue its asset buying program of at least $120 billion in bonds a month. The central bank indicated that it did not expect to hike rates through 2023.

Moreover, the Fed also stated that it expected gross domestic product growth to reach over 6% this year and for core inflation to reach over 2%, with both measures then projected to settle next year. Those projections, combined with the expected path of interest rates, shows that the central bank is sticking to its plan of letting the economy run as the United States recovers from COVID-19.

In response to the recent rise in Treasury yields, 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 concerned by how the Fed might manage the rise in long-term rates.

U.S. Employment: The U.S. unemployment rate has declined, but we still have some room in order to reach full employment levels. COVID-19 continues to impact the recovery of service industry employment in particular. The distribution of COVID-19 vaccines, stimulus efforts, along with COVID-19 spread mitigation, should continue to help the labor market.

Looking Ahead

Market participants will continue to keep a close eye on progress with vaccination programs as well as changes in COVID-19 cases, particularly in light of emerging variants of the virus. Strong fourth quarter earnings were an important driver in this year’s market results so far, and first quarter earnings will be announced shortly. This trend needs to continue in order for equities to keep performing well.



This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. All market and index data comes from FactSet and MarketWatch.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

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This Research material was prepared by LPL Financial LLC.

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