Market Commentary for the week ending February 20th, 2021
- Bond prices fell pushing yields to a 1-year high on the benchmark 10-Year U.S. Treasury.
- Retail sales surged now +7.7% above pre-pandemic levels.
- Energy and financial stocks were sharply higher while tech and utilities fell.
This Week’s Performance Highlights
The big story of the week was the sizable drop in bond prices pushing yields to a 1-year high. Although rates remain very low compared to historic levels, the importance of a rise in yields cannot be overestimated as cheap money, and the expectation of continued cheap money, has unquestionably been a significant catalyst for higher stock prices.
- For the week large U.S. stocks were lower by -0.2% as measured by the S&P 500 while the Dow Jones Industrials gained +0.2% and the tech-heavy NASDAQ Composite lagged off -1.1%. Year-to-date the NASDAQ still leads with a gain of +7.7% while the S&P 500 is higher by just +4.0%.
- Small U.S. stocks gave back a portion of their big year-to-date gain off -0.6% for the week but still higher for the year by +14.9%.
- Although the major averages did not register big moves for the week, there was a lot of movement among the various sectors. Energy stocks continued their robust move higher up another +4.9% for the week making this sector the best in 2021 by a wide margin higher by +21.9%. This week’s continued rally was a bit of a surprise given the price of oil fell about -1%.
- Right behind energy stocks were financials gaining +3.9% for the week and up +9.9% year-to-date making them second best performing sector in 2021. The move higher in bond yields would be considered a positive catalyst for this sector as banks tend to be more profitable in higher interest rate environments.
- International stocks were mixed with developed markets, on average, higher by +0.5%. Stocks in the United Kingdom were among the best performers gaining +2.9% while Italian stocks fell -1.5%. Emerging markets moved lower by -0.4% but are holding onto a very nice year-to-date gain of +11.3%.
- The price movement among the alternative assets were relatively large this week with commodities gaining +2.5% while gold fell by -2.5%. One factor pushing commodity prices up is a shortage of shipping containers making it more expensive to move them around the globe.
- Real estate stocks were down -0.8% but still higher in 2021 by +5.4%. This has been a welcomed reversal from losses in 2020.
- Bond prices posted a relatively sharp price drop of -0.9% for the week leaving the yield on the benchmark 10-Year Treasury at 1.340%. This big move was partially driven by the much better than expected report on retail sales (see below) suggesting the economy is strengthening and interest may need to move higher.
Although the 1.340% yield is about 2.5 times higher than it was just 6 months ago, the accompanying graph puts this in perspective showing, even at today’s level, yields are historically very low. That said, investors are enjoying this very cheap money and using it to justify higher stock prices. A continued move higher in yields could potentially slow the pace of stocks.
Robinhood, the online stock trading app at the center of the GameStop stock rally, received $271 million in the first half of 2020 (the most recent data available) selling customers’ trading orders to firms that execute the orders. Robinhood does not charge commissions but does receive these payments from firms such as Citadel Securities. This relationship was under a microscope this week as the CEO of Robinhood and found of Citadel were among those appearing before the House Financial Services Committee.
Goldman Sachs maintains an index of non-profitable technology stocks…those innovative companies that are losing money. As of late January this index had increased in price by nearly 5 times in just 10 months which was many multiples more than the S&P 500. Who says profits matter? Only time will tell if these higher prices are sustainable.
Retail Sales surged up a massive +5.3% in January, more than 4 times economists’ estimates, rebounding from three consecutive monthly declines. The headlines number was even stronger, up +6.1%, when excluding autos and gasoline sales. As the accompanying graph shows, retail sales are running at a record pace and +7.8% compared to pre-pandemic levels.
Some of the categories registering the biggest gains were department stores, internet retailers, electronics stores, and home-furnishing outlets all registering double-digit gains. Stimulus checks, generous unemployment benefits, and loosing restrictions on businesses all helped fuel the month’s growth.
Industrial Production slowed a bit from the prior month but continued to expand gaining +0.9% in the most recent month. Of the three components in this report, both manufacturing and mining were higher while utility output declined -1.2%.
Initial Jobless Claims took an unexpected turn for the worse coming in at 861,000 for the week much higher than economists had expected. Furthermore, numbers from the prior to weeks were revised higher. States that saw some of the biggest increases were California, Illinois, and Virginia while numbers fell in both Texas and Georgia.
The housing market showed atleast one indication of slowing with housing starts coming in below expectations and down from the prior month by -6.0% at 1.58 million annually. Cold weather and challenges in getting building materials were partially blamed. Year-over-year starts are off -2%.
Existing home sales continued robust inching higher by +0.6% in the most recent month to 6.69 million annually. Compared to a year ago, sales are up +23.7% and the average price has gained +14.1% to $303,900. The inventory of homes for sale fell to a record low with just 1.9 months of supply (6 months is considered a balanced market). Economists expect sales to remain robust assuming mortgage rates stay low.
Upcoming Economic Reports
- S&P CoreLogic Case-Shiller Home Price Index
- Leading Economic Indicators
- Consumer Confidence Index
- New Home Sales