March 1, 2021
Seasonal trends suggest that March will be wobbly and could be used as an excuse for further selling. We expect the markets to find support and subsequently challenge the recent highs. April is statistically the best month of the year for stocks.
February saw the benchmark 10-year Treasury note close the month at a yield of 1.459%, reaching an intraday peak at 1.558%, according to FactSet data. The dividend yield for S&P 500 companies in aggregate was at 1.5%, by comparison, while the Dow was 2% and for the Nasdaq Composite was 0.7%. This inflection point is often key to stock volatility.
Regarding the question of what degree rising yields will pose a problem for equities, strategists make the case that yields are likely to continue to rise but the advance will be checked by the Federal Reserve at some point. It is unlikely that the Federal Reserve will let US real yields rise much above 0%, given high levels of public and private sector leverage. Real adjusted yields are typically associated with rates on Treasury inflation-protected securities, or TIPS, which compensate investors based on expectations for inflation. Real yields have been running negative, which have been arguably encouraging risk taking. But the coronavirus vaccine rollouts, with a Food and Drug Administration panel on Friday recommending approval for Johnson & Johnson's (JNJ) one-dose vaccine and the prospects for further COVID aid from Congress, are raising the outlook for inflation.
One of the most critical factors for sustained growth will be employment. Markets will be looking for more clarity on the health of the labor market this month when nonfarm payrolls data for February are released. One big question about that key gauge of the health of U.S. employment, beyond how the market will react to good news in the face of rising yields, is the impact the colder than normal February weather will have on the data.
In addition to jobs data, investors will be watching this week for manufacturing reports for February from the Institute for Supply Management and construction spending on Monday.
Year-to-date, the Dow, S&P 500, and NASDAQ are all positive at 1.41%, 1.72% and 2.47% respectively. The 10-year Treasury is currently yielding 1.46%.
*Disclaimer: This report is a publication of Marchand Faries Financial Management, Inc. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgement of the author as of the date of publication and are subject to change.