Monday Morning Market Insights: Last Week in Review with Rusty Vanneman, Vol. 12

Happy Monday! Hope you had a nice weekend and still have a fighting chance in your March Madness bracket. I don’t, as the Fighting Illini loss essentially took me down.   

Moving On to the Markets

Last week saw the end of the recent string of winning weekly gains for various U.S. stock market indices.  Nonetheless, the outlook still looks bright as the market remains near all-time highs and the factors that got the market here (such as “Things Are Getting Better” and “Don’t Fight the Fed”) are still in place.   

That said, heading into month- and quarter-end, expect that rebalancing by institutional investors could provide some headwind to the market as they rebalance out of stocks back into bonds. It would make sense. It happened last year, too, but last year it was bonds into stocks.  That was arguably one reason why the market stopped falling then. 

The average stock in the overall U.S. market is now up 18% on the year. The S&P 500 is up 5%. The NASDAQ is up 5%.   

It’s been another good quarter for active management.  It looks like it will now end up being two quarters in a row that the S&P index has underperformed Large Cap Blend mutual funds. We haven’t seen that in a dozen years. 

Looking Back on the Last Year

Entering the week, the U.S. market is up 72% over the last year.  Small caps have more than doubled during that time. 

Tuesday marks the one-year anniversary of the bear market low from last year. Take a snapshot of that one-year return then. I believe there’s a chance it could be one of the best one-year returns for the U.S. market. 

When did smaller companies start to outperform?  Some say the “Big Shift” began on 9/2/20 and there is evidence of that in terms of relative stock market prices.  I, however, think it began a month earlier.  I began my career working with bond traders. Because of that experience, my bias was set, and I believe that the bond market generally leads stocks.  It should be noted that 10-year Treasury yields bottomed on 8/4 at an intra-day low just below 0.51%. 

Forecast from the Fed

Big news last week included comments from the Federal Reserve. The biggest takeaway is that the Fed remains accommodative (investors take note – “Don’t Fight The Fed”).  There was more to ponder on, though.  

First, the Fed did raise their forecast for 2021 GDP from 4.2% to 6.5%. That’s a big jump. Their forecast for inflation moved from 1.8% to 2.2%.  Now, that is above the 2% threshold they are known to care about, but remember, they are looking for a “long-term average of 2%+” before they get concerned. In other words, inflation really needs to jump for the Fed to act.  Lastly, the Fed did change their “dot plots” regarding their expectations for when they might make their next move. Though some of the Fed did think they might raise rates sooner than they expected before, it was still 2022 at the earliest.  The median expectation was for the first rate hike to take place in 2023.  If you’re asking me, I’ll take the under on that. 

What to Watch for this Week?  

We do have inflation data (PCE), and housing data that might rank among the more significant in a fairly busy week for economic data.  As for earnings, it’s a light week, but GameStop is reporting and that has become a big deal for some investors. 

The key market to watch remains interest rates. Ten-year Treasury yields closed last week at 1.74%—up another 10 basis points week over week.  Concerns about inflation remain a leading reason, with increased supply another consideration.  As for the former concern, in my opinion, investors should still be prepared for an uptick in official headline inflation the next few months as the bad data from a year ago scrolls off the year-over-year numbers.

Have a great week! For more insights and commentary, visit our Financial Advisor Success Hub.

0962-OPS-03/22/2021

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