Market Commentary

February 2021

The reflation trade was front and center in February. Major stock market indices were up again in February and investors have continued to rotate toward investments that are seen to benefit most from the re-opening of the world’s economy. Small caps outperformed once again as the Russell 2000 returned +6.2% while the S&P 500 returned +2.8%. Sector level performance diverged quite a bit as energy (+21.5%) and financials (+11.4) outperformed the broader market by notable margins. Foreign equity markets performed in line with large cap U.S. stocks as the MSCI EAFE index was +2.3% and MSCI Emerging Markets was +0.8% for the month. Oil prices continued to move higher as the benchmark WTI spot futures contract was up an additional +18.1% in February and is now +26.3% YTD.

Bond markets did not fare as well in February as the Bloomberg Barclays U.S. Aggregate index was -1.4% for the month and is now -2.2% YTD. U.S. Treasury yields increased as much as +40 basis points with most of the yield changes occurring within 5+ area of the yield curve. Real yields drove the increases in February as inflation breakeven rates have stabilized just above 2% since late December. Investment grade corporate credit spreads narrowed -7 bps and outperformed Treasuries in the rising rate environment. High Yield continued to outperform (+0.4% in February) and has recently benefitted from its shorter duration profile.

U.S. economic data released in February continued to show a stall of economic activity due in large part to the winter resurgence of Covid-19. Job gains of only +49,000 were reported to have occurred in January. The unemployment rate ticked down from 6.7% to 6.3% due mostly to a lower labor participation rate.  Personal income data was reported to have jumped +10% in January (due mostly from the additional fiscal support approved in December) while consumer spending grew +2.4%. This has caused a continued increase in the consumer savings rate, and economists are optimistic about a surge in consumer spending once the economy more broadly re-opens this year.

Sources: Bloomberg, Bloomberg Barclays

Image courtesy of Jorge de la Torriente

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