Top Weekly Themes
- Then There were Three – On Saturday, February 27, the U.S. Food and Drug Administration (FDA) issued an emergency use authorization for Johnson & Johnson’s Janssen COVID-19 Vaccine. This authorization now marks the third vaccine to become available in just over a year since the first cases were reported in the U.S. in January 2020. The single-dose vaccine should pull forward the timeline of a return to normalcy, with Johnson & Johnson expected to deliver over 20 million doses in March and, with manufacturing help from Merck, at least 100 million in the first half of 2021. On Tuesday last week, President Biden assured Americans that the U.S. would have enough supply to vaccinate all American adults by the end of May, a more ambitious target from the prior July goal. A quicker return to normal would also further support the positioning we detailed in our 2020 Outlook. Specifically, within the equity markets, value and small-cap stocks (each of which is levered to economically sensitive sectors like Industrials and Financials) should be overweight within portfolios.
- Tech Wreck – Growth, and more specifically Technology stocks, have been largely unchallenged since interest rates bottomed this time last year. However, this week we saw dramatic relative pressure on Technology stocks as the U.S. 10-yr Treasury rate continued its ascent to 1.50% and beyond. Between the end of 2020 and last Wednesday, Large Cap Value Stocks as measured by the S&P 500 Value Index have risen 6.20%, compared to a 1.46% decline for the Invesco QQQ ETF (QQQ), a common proxy for Technology stocks. Last Wednesday alone saw one of the most dramatic relative underperformance of Growth stocks in recent memory with the QQQ ETF declining by 2.75% compared to the S&P 500 Value Index is largely unchanged. We do not believe this will be the final capitulation for Growth stocks. As we’ve written in prior weeks, we expect there to be continued upward pressure on long-term yields as the economy re-opens providing additional relative outperformance for Value stocks.
- Fourth Quarter Earnings Come to a Close – With few remaining companies in the S&P 500 Index yet to report, we can definitively say the fourth-quarter earnings season finished almost as strong as it started. If you recall from our BMT Market Insights for the week ending January 29, 2021, the quarter had started on a high note with over 86% of the 116 companies reporting at that time posting earnings per share (EPS) in-line or better than analyst estimates. With hindsight, we can see this was a good indication of the results to come as 83.3% of the 486 companies reporting through March 4 have posted EPS that were in-line or above expectations. Notable outperformers on a sector basis were Communication Services, Technology, and Financials. Conversely, Energy, Consumer Discretionary, and Materials were the sectors with the most EPS estimate misses. We expect much better results in 2021 for 2020’s laggards as the year unfolds.
|Equities||Week (%)||YTD (%)||1-Year (%)||3-Year (%)||5-Year (%)||Div Yield (%)|
|Russell 1000 Value||(0.7)||5.5||16.2||8.58||11.15||2.09|
|Russell 1000 Growth||(2.9)||(4.0)||31.7||19.96||20.69||0.77|
|MSCI EM (Emerging Markets)||(2.7)||4.5||32.9||7.33||14.26||1.82*|
|Fixed Income||Week||YTD||1-Year||3-Year||5-Year||Div Yield|
|Bloomberg Barclays US Aggregate||0.1||(2.8)||0.1||5.08||3.48||1.50|
|Bloomberg Barclays US High Yield – Corporate||(0.2)||0.7||7.8||6.74||8.41||4.30|
|Bloomberg Barclays Municipal Bond||0.3||(0.8)||1.4||4.88||3.57||1.23|
|Bloomberg Barclays Global Aggregate x US (Country)||(0.8)||(3.2)||4.1||2.50||3.43||0.90|
|Crude Oil WTI (NYM $/bbl) Continuous||0.5||31.6||36.4||1.4||12.2||63.8|
|Natural Gas (NYM $/mmbtu) Continuous||(1.0)||10.1||52.2||1.1||10.8||2.8|
|Gold NYMEX Near Term ($/ozt)||(4.2)||(10.2)||3.6||8.8||6.0||1,700.2|
|Copper Cash Official LME ($/mt)||(8.6)||13.5||54.3||8.5||12.3||8,786.5|
|Currencies||1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
|U.S. Dollar per Euro||1.22||1.22||1.11||1.23||1.10||1.20|
|Japanese Yen per U.S. Dollar||106.27||103.25||107.29||105.48||113.81||107.60|
|U.S. Dollar per British Pounds||1.41||1.37||1.28||1.38||1.42||1.40|
Chart of the Week: Is the Strong Housing Market Sustainable?
- The first chart shows the relationship between the unemployment level and residential home sale prices. An interesting development is how home prices constantly rose in 2020, despite record-breaking levels of unemployment.
- Recent home price performance is in stark contrast to what was observed in 2008-2009. During the last recession, it took until early 2012 for home prices to recover to pre-recession levels, but 2020 never saw prices fall in the first place.
- The second chart displays the imbalance of supply and demand within the residential housing market. Both the number of days a home is on the market and the number of active residential home listings have constantly fallen throughout 2020. Additionally, many companies have issued permanent work-from-anywhere policies which further increases the number of homebuyers in the market.
- We think a steadily improving labor market, in combination with certain structure shifts like flexible work locations, should continue to support the U.S. housing market amid persistently constrained supply.
Commentary: Inflation: Global Economic Data Continues to Improve
While it may take years for the world population to become inoculated, the global economy remains in growth mode. The chart below provides an overview of the position and direction of eighteen Purchasing Managers’ Indices (PMI) for the world’s major industrial economies. Top performers for February include Taiwan, Germany, and U.S. Manufacturing, all registering over 60. Conversely, Mexico’s economy continues to struggle with the country still contracting since February of 2020. Notably, China has seen economic activity negatively impacted by renewed lockdowns during its Lunar New Year holiday amid a spike in COVID-19 cases during January.
We anticipate continued improvement in global economic data to be beneficial for our overweight to Developed International equities. These markets are more cyclical than the U.S. equity market which is dominated by technology-related stocks. For example, Financials and Industrials are the largest sectors in the MSCI EAFE Index, with 17.3% and 15.4% weights, respectively. In comparison, the S&P 500 Index is most heavily exposed to Information Technology and Health Care with Financials and Industrial weights registering a paltry 11.2% and 8.4%, respectively. In fact, if you combine all the economically sensitive sectors; Financials, Industrials, Consumer Discretionary, Materials, and Energy, the MSCI EAFE Index has 56.9% allocated towards these areas compared to just 37.4% in the S&P 500. We expect this increased exposure to prove beneficial as the global economy emerges from the pandemic.