March 06, 2021

Monthly Market Summary – February 2021

Equity markets rallied most of the month on optimism spurred by solid economic and corporate earnings reports, the accelerating COVID-19 vaccine rollout and decreasing number of new cases, and progress in fiscal stimulus talks in the U.S. Congress.  However, there was a wide dispersion of returns between various segments of the equity markets.  Investors’ optimism regarding economic growth fueled the reflation trade and rotation into more economically sensitive stocks that began late in 2020.  Therefore, value and smaller-sized stocks outperformed larger-capitalization (cap) and growth stocks.  Commodity prices also rallied in February.  Oil prices rose on tight supply conditions with the price of West Texas Intermediate crude oil moving up to as much as $61.50 per barrel, a 13-month high.  Copper hit a 10-year high and lumber futures prices hit new record highs.  The price of gold, however, dropped as the demand for safe haven assets declined.  Longer-term bond prices also declined, and yields rose, on worries about increasing inflation as the economy improves and the U.S. government debt level is set to rise due to the large stimulus programs being discussed.  The 10-year U.S. Treasury bond yield rose to 1.6% during the month, which was the highest level since February 2020.  This rise in long-term bond yields spurred a brief equity market sell-off late in February, particularly in large-cap growth stocks.

Each of the U.S. equity market indices we track posted a positive return for February except the S&P 500 Growth index which was flat.  The small and mid-cap indices outperformed the large-cap S&P 500 index.  The value index outperformed the growth index by a wide margin in each market cap category.  The energy sector was the top performing sector with a double-digit return in both the S&P 500 and the Russell MidCap indices reflecting the sharp price increase for crude oil and the improving outlook for demand.  The materials sector, with a double-digit return, was the top performing sector in the small-cap index boosted by strong demand.  The financials sector also generated a double-digit return in each market cap category.  The steepening yield curve (long-term bond yields rising while short-term bond yields stay low due to Federal Reserve policy) is seen as a positive for the sector, especially bank earnings.  The utilities sector, with a negative return, was the poorest performing sector in each market cap category as investors rotated away from stocks considered to be more defensive.  The difference in returns for the consumer discretionary sector by market cap was also noteworthy in February.  The sector in the S&P 500 index had a small negative return due to price drops for previous market leaders such as Tesla and Amazon while the sector generated a high single-digit return in both the mid and small-cap indices.

The return for the MSCI EAFE index of developed international equities trailed the S&P 500 index return by a small margin but outperformed the MSCI Emerging Markets (EM) index on a U.S. dollar basis.  Dollar returns were slightly lower than local currency returns for both the EAFE and EM indices as the dollar was mixed relative to major currencies.  Just as in the U.S., value stocks outperformed growth stocks by a wide margin in both the EAFE and EM indices.  Energy, materials, and financials were the top performing sectors while consumer staples, utilities, and healthcare had among the weakest returns.  On a geographical basis, among international developed markets, the euro region outperformed the Pacific and Far East regions.  Among emerging markets, Taiwan continued as a top performer reflecting the strong demand for semi-conductors.  India rebounded after a weak return in January and was another of the top performing emerging market countries.  At the other end of the spectrum, Brazil was the laggard with a mid-single-digit negative return due to a shake-up in the management team of state-controlled oil company Petrobras.  China also had a negative return in part reflecting less demand for stocks as the central bank withdrew money from the financial system as part of the phase out of emergency pandemic related stimulus measures.

U.S. bond market sector returns were mostly flat to negative in February.  Only the shortest maturity bond indices and the corporate high yield bond index posted a positive return.  The corporate high yield index had the best return, which was 0.4%.  Long-term bonds had the lowest returns as the increased optimism about economic recovery and increasing concerns about rising inflation drove yields higher.  The 20+-year Treasury bond index declined almost 6% for the month.

The Bloomberg Commodity index generated a return of 6.5% for February.  The petroleum sub-index had the best return among the sub-indices we track with a gain of over 17% as oil prices rose to pre-pandemic levels.  The industrial metals sub-index also had a double-digit gain reflecting strong demand.  On the other end of the spectrum, the precious metals sub-index had the weakest performance with a -5.5% return as the price of both gold and silver dropped as the demand for safe haven assets declined.

Vogel Consulting, LLC (Vogel) Tactical Recommendations

We have a neutral view on growth relative to value preferring to have exposure to sectors benefiting from secular growth trends along with some exposure to cyclicality to participate as the economy improves.  We favor equites over bonds with yields still at historic lows.  Within the equity allocation, we recommend an equal weight position relative to long-term targets to U.S. large-cap, mid-cap, and small-cap stocks, as well as to developed international market equities.  We recommend an overweight in emerging markets equities due to expectations for higher economic growth rates than in developed countries and for a boost to returns from a declining U.S. dollar.  Within our fixed income recommendation, we continue to favor short to intermediate maturities.  We continue to recommend an underweight allocation to hedge funds.  We recommend keeping at least a year of cash reserves as we expect bouts of market volatility throughout the year.

 The statistical information contained in this commentary has been compiled from publicly available sources and is presented to you for your review and for discussion purposes only. The information contained in this commentary represents the opinion of the author(s) as of its date and is subject to change at any time due to market or economic conditions.  These comments do not constitute a recommendation to purchase, sell or hold any security, and should not be construed as investment advice or to predict future performance.  Past performance does not guarantee future results.

 The statistical information contained in this commentary was derived from sources that Vogel Consulting, LLC believes are reliable, and such information has not been independently verified by Vogel.  Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of the Russell Investment Group.  An index is not managed and is unavailable for direct investment.