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February 2021 Market Commentary: ‘Who Listens to Warren Anymore?’

Data Source: Bloomberg

 

To read full commentary, click here.

 

February 2021 Highlights:

  • February’s market advance followed a similar pattern to that of January: the first half of the month saw strong performance in momentum favorites such as growth stocks and emerging markets only to sharply reverse during the latter half of the month.
  • Global equity markets continued their advance throughout most of February due to continued optimism over vaccination efforts that will help the world move past COVID as well as high expectations for a $1.9 trillion federal stimulus spending package to be passed shortly.
  • After having advanced just over 6% through the first half of February, global stocks (MSCI All-Country World Index) turned down but still finished positive for the month (+2.3%). The U.S. Market (S&P 500) and MSCI Europe ended up outperforming major regions after having lagged through most of the month.  S&P 500 returned 2.8% followed by MSCI Europe (+2.4%).  MSCI Japan and Asia ex Japan returned 1.5% and 1.4%, respectively while MSCI Emerging Markets returned 0.8% after having been up as high as 8% through the first half of the month.
  • Emerging Markets took the brunt of the sharp rise in global interest rates and counterrally in the U.S. dollar. In addition, Brazilian markets came under pressure following reports that President Jair Bolsonaro fired the head of the state-owned oil company Petrobras for failing to keep diesel prices low.
  • U.S. small caps continued their strong run from January with the S&P 600 Index returning 7.7% versus 2.8% for the S&P 500. Small caps were able to hang onto their leadership throughout most of the month.  S&P Pure Value returned 10.6%, outperforming S&P Pure Growth which returned 1.6%.  Both styles were performing in line with each other throughout most of the month but then diverged following the sharp rise in interest rates.
  • Once again, Energy was the top performing sector in February benefitting from rising oil prices. Financials benefited from a steeper yield curve while cyclicals generally outperformed defensive sectors which were partly hurt by rising interest rates.
  • Among risk factors, ‘Momentum’ underperformed all other factors after having led throughout most of the month. Value and High Quality outperformed High Dividend and Min Vol, both likely hurt by higher interest rates.
  • Investment grade fixed income posted a loss for the month as interest rates rose in anticipation of higher inflation and a large deficit-financed federal spending package. The Bloomberg/Barclays US Aggregate Bond Index dropped 1.4% mainly due to a rise in interest rates.
  • Treasury rates rose across most of the curve in a particularly volatile manner, especially during the final week of the month following Powell’s congressional testimony and an ill-timed Treasury auction of 5- and 7-year paper that was poorly received by the markets. As the 10-Year U.S. Treasury Yield rose to a post-pandemic high of 1.50% (before settling at 1.40% by month-end), the intermediate part of the curve witnessed a volatile sell-off that saw 6+ standard deviation spikes in intermediate rates.
  • However, U.S. high yield continued to enjoy moderate gains as high yield spreads remain below 3% after having broken through pre-pandemic lows before widening at the end of the month. The Bloomberg Barclays US High Yield Index returned 0.4%.  Foreign currency and emerging market debt underperformed due to a combination of higher interest rates and a stronger U.S. dollar.
  • Within equity alternatives, Commodities posted another strong month with the S&P GSCI Commodities Index returning 10.6% on the strength of oil, industrial metals, and agricultural prices. Precious metals continue to remain weak as they represent the antithesis of the reflationary trade and were especially hurt by a rise in real (inflation-adjusted) interest rates.  The Dow Jones REIT Index performed in line with the broader U.S. market.

To read full commentary, click here.

By: Benjamin Lavine