Markets Mark One-Year of COVID in March
March was a strong month overall for equity markets, despite the volatility. The S&P 500 rose 3.9% to another all-time high as of 26-Mar-21. However, the reflation trade took a breather as Utilities (+11%) and Staples replaced Energy and Financials on the monthly podium. Technology and Communications were shunned like immorality. Outside of the US, the TSX rose 3.2%, led by strength in Financials. The MSCI World Index rose only 2.1%, weighed down by renewed Covid shutdowns. The Japanese Nikkei was relatively flat but its year-to-date gain is over 7%.
The 10-year US Treasury Yield’s captivating rise persisted. At the Federal Reserve meeting on 17-Mar-21, chairman Jay Powell, reiterated their intention to let inflation ‘run hot’ before considering actions to control rates. As month-end approached the posted rate for the benchmark bond was 1.77%, a significant jump from the February close (1.415%). Fortunately, foreign demand was robust at the regular Treasury auctions which allow the market to determine rates without intervention from the Federal Reserve.
The US Dollar, as measured by the DXY, breached 93 for the first time since November 2020. The US is perceived to have a growth advantage because of its comparatively effective vaccination rollout and a quicker economic reopening. However, it is unusual for the stock market to improve while the US dollar gains and interest rates expand.
A consequence of a strong US dollar is typically weak commodity prices. Accordingly, the CRB Index fell 1.4%. Faltering commodities coincided with reports of deleveraging in China and a corresponding 7.2% drop in the Shanghai Composite Index. Previously, strong Chinese demand for industrial commodities propped up prices as the nation exited the pandemic while other countries struggled with soaring virus cases. Now the Western world is beginning to resurface from its economic pause, with consumers eager to spend and unprecedented sums of public support. On 04-Mar-21, Reuters reported China was targeting economic growth of just 6 % this year. This could be the first time in 45 years that the US economy outpaces China.
Speaking of Covid, we would be remiss if we did not stop to recognize that during March, we officially lapped the one-year anniversary of global lockdowns. The S&P 500 traded as low 2,237 on 23-Mar-20; 76% below the close (3,910) one year-later.
At the time of the trough, the Fed cut its benchmark rate to 0-0.25%, announced plans to support bond markets through its $120 billion monthly Treasury and mortgage-backed securities purchases, and later indirectly purchasing high yield and investment grade corporate credit. The Federal Reserve has added over US$3 Trillion in assets to its balance sheet (up 65%), helping to support US Treasury bond issuance to fuel Covid stimulus and stabilize both the market and the economy. Those that abide by the adage, “Don’t Fight the Fed”, were rewarded for listening. The following list summarizes other notable highlights from the past year.
While the speed and size of the economic and market fallout were unprecedented, so too has been the recovery. This serves as another reminder that good times are closer than one can imagine, even when the embers are glowing and your eyes are still burning from the smoke.