All Three Large Cap Indicies Hit New Record Highs

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Primary drivers in the market last week included the signing of the American Recovery Act, exception­al progress on vaccine distribution, and a supportive calendar of economic reports. All three large cap U.S. indices (S&P, DJIA, NASDAQ) set new record highs while small caps surged over 7%. Gains were broad based with value/cyclicals continuing to lead the way, but we did see a strong bounce back in technology names as well. Developed and emerging international markets were up comparable to large cap U.S. markets. Both the USD and oil traded down slightly on the week. Rates moved higher in a similar fashion to recent weeks with the longer maturities rising 8 – 13 basis points and the short end remaining anchored by policy.

Market Anecdotes
•The $1.9t American Recovery Act became law last week, delivering a historic fiscal stimulus surge to many parts of the economy through stimulus checks, extended unemployment benefits, state & local government payments, Covid research/testing/vaccine distribution, and more.
•BCA Bank Credit Analyst noted con­sumers will have an estimated $2t in ex­cess savings at their disposal by April and should begin seeping into the economy as activity normalizes.
•The economic impact of fiscal stimulus (particularly this size/scope) should be to increase aggregate demand. The unknown is how much the curve will shift and how much real slack there is to soak up in the overall economy.
•Strategas made the important point that the actual re-opening and recovery in mobility/activity is the real economic stimulus, far outweighing the American Recovery Act.
•The outperformance of financials over technology since September has been pronounced but somewhat muted due to the surge in ‘non-profitable’ tech company shares.
•The NASDAQ entered correction territory on Monday but bounced off what were likely some short-term oversold conditions the remainder of the week.
•The selling of Treasuries continued last week and, like last week, the focus was not inflation fears. The slope of the 10 year and 30 year was again pretty static but the 2 year 5 year steepened again.
•Currently markets expect the Fed to begin hiking rates in November 2022, an­other in May 2023, and again in Novem­ber 2023 – notably more hawkish than the Fed’s current guidance.
•Arbor Data noted a significant part of the recent USD rally may be some short squeezes in addition to U.S. economic growth leading most non-U.S. markets.
•China’s annual National People’s Congress kicked off on Friday with the unveiling of economic targets and budgets for the year. Beijing noted GDP growth over 6%, 3% GDP, and unemployment similar to 2019 levels with a fiscal deficit target of 3.2% of GDP.
• The European Central Bank announced an increase to its Quantitative Easing scheme and left Pandemic Emergency Purchase Program (PEPP) unchanged at $2.21t until March 2022. European Union stocks rallied, and sovereign yields fell.

Economic Release Highlights
•February headline and core Consumer Price Index registered a benign 1.7% and 1.3% respectively.
•February NFIB Small Business Op­timism registered 95.8, slightly below consensus but a small improvement over January.
•The flash University of Michigan con­sumer sentiment report for March came in significantly higher than expected, rising to 83.0 (78.5 expected) and up nicely from 76.8 in February.
• January Job Openings and Labor Turnover Survey (JOLTS) report has job openings at the highest levels since Febru­ary 2020.

 

 

 

 

 

 

 

 

Investment Advisory Services are offered through Virtue Capital Management, LLC, an SEC Registered Investment Adviser. This newsletter is not to give investment advice. Before investing in any advisory product please carefully read any disclosure documents, including without limitation, the firm’s Form ADVs. Indices do not reflect the deduction of any fees or expenses. They are not available for direct investment. Exposure to an asset class represented by an index is available through investable instruments based on that index. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the Nasdaq. The DJIA was designed to serve as a proxy for the broader U.S. economy. The Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. It is used as a broad-based market index. The S&P 500 index is designed to be a broad based unmanaged leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe or representative of the equity market in general. The Russell 3000® Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. Total Return assumes dividends are reinvested. The Russell 1000 is a subset of the Russell 3000 Index. It represents the top companies by market capitalization. The Russell 1000 measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 2000 index is an index measuring the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States. Visit www.russell.com/indexes/ for more information regarding Russell indices. The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. Nothing contained herein constitutes financial, legal, tax, or other advice. These opinions may not fit your financial status, risk and return profile or preferences. Investment recommendations may change, and readers are urged to check with their investment adviser before making any investment decisions. Estimates of future performance are based on assumptions that may not be realized. Past performance is not necessarily indicative of future returns or results. No representation is made as to the accuracy, completeness or timeliness of the information in this material since certain information herein is based on or derived from information provided by independent third-party sources. All enclosed material including market analysis data provided Taiber Kosmala & Associates, LLC. There is no duty to update this information. The Wilshire 5000 Total Market Index represents the broadest index for the U.S. equity market, measuring the performance of all U.S. headquartered equity securities with readily available price data. The PHLX Semiconductor Sector Index (SOX) is a capitalization-weighted index composed of 30 semiconductor companies. The companies in the Index have primary business operations that involve the design, distribution, manufacture and sale of semiconductors. The index is designed to track the performance of listed semiconductors. The Case-Shiller Index, formally known as the S&P/Case-Shiller Home Price Index is made up of several indexes that track the value of single-family detached residences using the arms-length and repeat-sales methods. It is used as a barometer not just of the housing market, but also of the health of the broader economy. For more information on the index, please visit https://www.spglobal.com/. All information obtained from Taiber Kosmala & Associates (2020. The secured overnight financing rate (SOFR) is a benchmark interest rate for dollar-denominated derivatives and loans that is replacing the London interbank offered rate (LIBOR). Interest rate swaps on more than $80 trillion in notional debt switched to the SOFR in October 2020.

Holiday Shortened Week Shows Encouraging Numbers.

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The holiday shortened week saw encouraging economic prospects translate to a textbook, pro-cyclical moves across markets as evidenced by rallies in cyclical areas of the stock market, commodities, and bond yields.

The economic calendar provided a boost with robust retail sales, continued strength in the housing market, and further evidence of a strong manufacturing sector. All major indices set new record highs on Tuesday, but the S&P 500 finished the week down 0.71% due to heavy weights in technology and healthcare which struggled. Financials, materials, industrials, and energy were all positive (as was the equal weight S&P). Bond yields moved decisively higher and steeper, translating to softness in higher valuation and rate sensitive areas. The USD traded lower in step with its counter-cyclical nature while commodities moved higher (ex/oil).

Market Anecdotes
• One year ago, last Friday, the S&P 500 closed at a record high, then went on to lose 33% over the next five weeks.
• Wal-Mart’s earnings call marked the unofficial end of what was an encouraging earnings season where, despite record beat rates, stock price reactions were one of the weakest on record.
• Significant debate continued sur- rounding what level of yields will begin to prove troublesome for equities. Market internals remain encouraging at this time.
A sustained move higher in yields with a simultaneous confirmation of a shift in market internals remain a key focus.
• Developed market international stocks were up last week while emerging markets were down slightly. Both outperformed broad U.S. markets. Yield curve steepening has varied globally.
• Inflation is coming in the near term due to base effects, clear evidence of bottle- necks, and some order of pipeline effect. 5 year forward breakeven have recovered but are still not overly high.
• Fed speakers (ten last week) were busy pre-excusing the coming uptick in inflation given their intent on maintaining balance sheet operations and policy rates for the time being.
• U.S. policy developments last week included an immigration reform proposal, a walk back on prospects for student loan debt cancellation, extending foreclosure moratoriums through June 30th, officially rejoining the Paris Agreement, and the beginning of addressing tax increases.
• The stimulus package is expected to pass the House this week, followed by the Senate in early March, and POTUS signing into law mid/late March.
• The Atlanta Fed GDP Now Q1 estimate surged to 9.5% after factoring in the economic data last week (retail sales, industrial production, regional surveys).
• Former ECB President Mario Draghi officially replaced Giuseppe Conte as Italy’s new PM.
• Bloomberg reported Pfizer and BioNTech SE vaccines “appeared to stop the vast majority of recipients in Israel becoming infected, providing the first real-world indication that the immunization will curb the transmission of the coronavirus.” Economic Release Highlights
• January Retail Sales crushed consensus forecast (5.3% vs 1.1%) on the headline number as well as all sub-index metrics including ex-vehicles & gas (6.1% vs 0.5%) and control (6.1% vs 0.9%).
• January Industrial Production came in at a very solid 0.9%, beating consensus of 0.5%. Both manufacturing output and capacity utilization also came in higher than forecasted.
• February Housing Market Index (84 vs 83) was in line with estimates, continuing to reflect extraordinary positive homebuilder assessments of current housing market conditions.
• January Housing Starts (1.580M) and Permits (1.881M) missed and beat forecasts respectively after strong beats the prior two months.
• February flash Purchases Mangers Index (PMI) (M,S,C) showed near universal strength and improvement across the manufacturing sector but continued weakness in services (CoVid) with the U.S. continuing to act as a bright spot – U.S. (58.5, 58.9, 58.8), EU (57.7, 44.7, 48.1), and Japan (50.6, 45.8, 47.6).
• The February Empire State Manufacturing Index doubled consensus estimates, registering 12.1 vs a 5.7 forecast.
• The February Philly Fed Manufacturing Index came in strong at 23.1 versus forecast of 20.0.

 

 

 

 

 

 

 

 

Investment Advisory Services are offered through Virtue Capital Management, LLC, an SEC Registered Investment Adviser. This newsletter is not to give investment advice. Before investing in any advisory product please carefully read any disclosure documents, including without limitation, the firm’s Form ADVs. Indices do not reflect the deduction of any fees or expenses. They are not available for direct investment. Exposure to an asset class represented by an index is available through investable instruments based on that index. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the Nasdaq. The DJIA was designed to serve as a proxy for the broader U.S. economy. The Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. It is used as a broad-based market index. The S&P 500 index is designed to be a broad based unmanaged leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe or representative of the equity market in general. The Russell 3000® Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. Total Return assumes dividends are reinvested. The Russell 1000 is a subset of the Russell 3000 Index. It represents the top companies by market capitalization. The Russell 1000 measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 2000 index is an index measuring the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States. Visit www.russell.com/indexes/ for more information regarding Russell indices. The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. Nothing contained herein constitutes financial, legal, tax, or other advice. These opinions may not fit your financial status, risk and return profile or preferences. Investment recommendations may change, and readers are urged to check with their investment adviser before making any investment decisions. Estimates of future performance are based on assumptions that may not be realized. Past performance is not necessarily indicative of future returns or results. No representation is made as to the accuracy, completeness or timeliness of the information in this material since certain information herein is based on or derived from information provided by independent third-party sources. All enclosed material including market analysis data provided Taiber Kosmala & Associates, LLC. There is no duty to update this information. The Wilshire 5000 Total Market Index represents the broadest index for the U.S. equity market, measuring the performance of all U.S. headquartered equity securities with readily available price data. The PHLX Semiconductor Sector Index (SOX) is a capitalization-weighted index composed of 30 semiconductor companies. The companies in the Index have primary business operations that involve the design, distribution, manufacture and sale of semiconductors. The index is designed to track the performance of listed semiconductors. The Case-Shiller Index, formally known as the S&P/Case-Shiller Home Price Index is made up of several indexes that track the value of single-family detached residences using the arms-length and repeat-sales methods. It is used as a barometer not just of the housing market, but also of the health of the broader economy. For more information on the index, please visit https://www.spglobal.com/. All information obtained from Taiber Kosmala & Associates (2020. The secured overnight financing rate (SOFR) is a benchmark interest rate for dollar-denominated derivatives and loans that is replacing the London interbank offered rate (LIBOR). Interest rate swaps on more than $80 trillion in notional debt switched to the SOFR in October 2020.

Rates Move Higher and Steeper, US Treasury Rates Bizarre

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Rates moved both higher and steeper again last week. Curve steepening has been pronounced with the 2-10 at 1.30% and the
3m-10 at 1.40%. While bonds are oversold in the short term, the long-term trend line should eventually take yields up to the 2.0%-2.5% area.
• We saw some very bizarre US Treasury rate action last week. Tuesday saw 2 year and 30 year fractionally higher while 5 year and 10year were lower. The shortest (1bps) and longest (3bps) maturities did not move too much while 5 year were up 16bps and 10 year & 20 year were up only 10bps. A clear kink in the curve.
• Momentum and technology stocks are bearing the weight of the rise in yields. MTUM, a proxy for the broad momentum factor across the US equity market, was down over 5% across 5 days which is only the second time it has reached that degree of a selloff since March.
• Central bankers on both sides of the Atlantic did their best to assure markets last week. Powell reiterated the Fed’s commit- ment to explicit forward guidance to the Senate Banking Committee and offered reassuring views on inflation and the rise
in yields. Lagarde and Schnabel also made clear the ECB will ensure there will be no unwarranted tightening of financing condi- tions.
• In the past, dovish braying and big QE helped stocks AND bonds but recently markets have been behaving as if there has been a shift in market psychology translat- ing to a change in bond yield to stock price correlation.
• Inflation remained a key focus of market participants last week. BCA noted West Texas Intermediate prices rising 70% since October alongside correlation data between gasoline prices and headline inflation.
• In a separate research note, BCA ad-dressed several myths surrounding 1970’s style inflation relative to today.
• Strategas reiterated confidence in the overall market due to continued internal market dynamics such as reopening pairs, BB/BBB spreads, CD vs CS, high beta vs low beta, advance/decline ratios, and cycli-cal sector performance.
• The $1.9t stimulus package passed the HOR and is heading to the Senate. Strategas estimates approximately $700b of consumer related stimulus will hit within the next six months.

Economic Release Highlights

• January Personal Income and Outlays report showed MoM personal income (10% vs 9.4%) and personal consumption (2.4% vs 2.2%) both higher than expected while core PCE was in generally in line with expectations at MoM (0.3% vs 0.1%) and YoY (1.5% vs 1.4%).
• December’s Case-Shiller Home Price Index rose more than expected for a second consecutive month at MoM (1.3%a vs 1.0%e) and YoY (10.1%a vs 9.6%e).
• New (923k vs 855k) and Pending
(-2.8%a vs 0%e) Home Sales were mixed with new exceeding pending continuing to lag.
• Conference Board Consumer Confi-dence for February came in higher than expected (91.3 vs 90.0) but remained somewhat subdued.
• The final UofM Consumer Sentiment for February remained at the relatively subdued level of 76.8a vs 76.4e.
• January Durable Goods Orders acceler-ated faster than expected (3.4% vs 1.1%), well over December’s 0.5%, providing further evidence of an upward trending manufacturing cycle.

 

 

 

 

 

Investment Advisory Services are offered through Virtue Capital Management, LLC, an SEC Registered Investment Adviser. This newsletter is not to give investment advice. Before investing in any advisory product please carefully read any disclosure documents, including without limitation, the firm’s Form ADVs. Indices do not reflect the deduction of any fees or expenses. They are not available for direct investment. Exposure to an asset class represented by an index is available through investable instruments based on that index. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the Nasdaq. The DJIA was designed to serve as a proxy for the broader U.S. economy. The Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. It is used as a broad-based market index. The S&P 500 index is designed to be a broad based unmanaged leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe or representative of the equity market in general. The Russell 3000® Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. Total Return assumes dividends are reinvested. The Russell 1000 is a subset of the Russell 3000 Index. It represents the top companies by market capitalization. The Russell 1000 measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 2000 index is an index measuring the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States. Visit www.russell.com/indexes/ for more information regarding Russell indices. The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. Nothing contained herein constitutes financial, legal, tax, or other advice. These opinions may not fit your financial status, risk and return profile or preferences. Investment recommendations may change, and readers are urged to check with their investment adviser before making any investment decisions. Estimates of future performance are based on assumptions that may not be realized. Past performance is not necessarily indicative of future returns or results. No representation is made as to the accuracy, completeness or timeliness of the information in this material since certain information herein is based on or derived from information provided by independent third-party sources. All enclosed material including market analysis data provided Taiber Kosmala & Associates, LLC. There is no duty to update this information. The Wilshire 5000 Total Market Index represents the broadest index for the U.S. equity market, measuring the performance of all U.S. headquartered equity securities with readily available price data. The PHLX Semiconductor Sector Index (SOX) is a capitalization-weighted index composed of 30 semiconductor companies. The companies in the Index have primary business operations that involve the design, distribution, manufacture and sale of semiconductors. The index is designed to track the performance of listed semiconductors. The Case-Shiller Index, formally known as the S&P/Case-Shiller Home Price Index is made up of several indexes that track the value of single-family detached residences using the arms-length and repeat-sales methods. It is used as a barometer not just of the housing market, but also of the health of the broader economy. For more information on the index, please visit https://www.spglobal.com/. All information obtained from Taiber Kosmala & Associates (2020. The secured overnight financing rate (SOFR) is a benchmark interest rate for dollar-denominated derivatives and loans that is replacing the London interbank offered rate (LIBOR). Interest rate swaps on more than $80 trillion in notional debt switched to the SOFR in October 2020.