Sightline Weekly Market Update: Vaccine Rollout Creates Investor Sentiment Crosscurrents
Concerns over inflation, interest rates, vaccine rollouts, and reopening continue to weigh on the markets as major indexes finished the week mixed. Small caps struggled for a second week, relinquishing the leadership role they have held since the beginning of the year. Meanwhile, energy bounced higher on news of the Suez Canal blockage and expectations that it could have been up to an additional ten days before the blockage was removed. Other sectors showing strength were consumer staples, utilities, materials, and real estate.
As of closing on Friday, March 26, while the TSX was essentially flat on the week, it lost 13 basis points but remained positive for the year-to-date at 1.85%. The S&P 500 gained 1.57% during the week, and the year-to-date is up 5.82%. The Dow Jones, which is more reflective of international fund flows, was up 1.36% for the week and year-to-date has gained 8.06%. The tech-laden Nasdaq lost 58 basis points during the week and continued to be in positive territory year-to-date, advancing 1.94%. The S&P Midcap 400 lost 17 basis points but fared better than the small-cap Russell 2000, which dropped 2.89% on the week. However, both indexes are still leading the large-cap indexes gaining year to date 13.14% and 12.32%, respectively.
The vaccine rollout continues to create crosscurrents for investor sentiment. The efficacy of the various vaccines on the new variants is under question, as is the necessity of lockdowns, masking, and social distancing. Pockets of rising infection rates in several states and European countries are extending lockdowns and stalling economic recovery. Just this week, Britain announced travel restrictions for all residents. Traveling abroad for holidays is also illegal unless the reason for travel is permitted under the new guidelines.1 Germany extended their lockdown until mid-April, and Belgium closed business deemed non-essential and schools for another four weeks. Despite the increasing number of vaccines available to younger cohorts, some experts think restrictions may continue to be in place until all countries have received and vaccinated the majority of the population.
In economic news for the week, new home sales fell 18.2% in February to a seasonally adjusted 775,000 on higher prices than January. However, new home sales were 9.1% higher than a year ago. The decline over January was attributed to weather with severe storms in much of the country.2 On Wednesday, the US Census Bureau announced that the February durable goods manufacturer’s shipments, inventories, and orders (durable goods are those lasting more than one year) were down 1.1% after rising by 3.5% in January.3 The consensus was for a .4% increase and the decline was attributed to weather. On Thursday, the Labor Department released the advanced figure for adjusted initial jobless claims. The figure was 684,000, a drop of 97,000 from the previous week’s revised higher number of 781,000 and beating the median forecast of 735,000.4 Continuing claims for benefits in all programs climbed 733,862 from the last week to 18,952,795. Consumer spending, also influenced by weather conditions, fell in February by 1%, recording the largest one-month drop since April 2020 after rebounding in January by 3.4% and personal income fell by 7.1% after it exploded 10.1% in January.5 The University of Michigan Consumer Survey came in higher than earlier estimated at 84.9, a monthly increase of 10.5% but its year-over-year still -4.7%. Also reported was people’s impatience with isolation voiced by nearly one-third of consumers. As vaccinations become more available, it would not be surprising to see frustration over government travel and testing procedures grow.6 Inflation data continues to be muted, with core inflation just .1%; however, it is expected to increase next month. Rates for the 10-year Treasury, which caused concerns for investors in previous weeks, gave up a little ground, finishing the week at 1.68% for US Treasuries and 1.50% for Canada’s.
As investor sentiment jumps from one news announcement to the next, it is hard not to believe that specific sectors will continue to experience volatility if rates continue to move higher. Simultaneously, the general market presses higher on the back of value, and small-cap stocks have become undervalued over the last several years. The most hated sectors are likely to become the most favored as we enter the next cycle. The current bull market is the most hated in history, with the highest bullish reading in November of about 56%. There is reason to believe leadership transition from growth to value and small-cap stocks will propel this market higher in the coming months with so much cash on the sidelines.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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