March was a very nice month for stock market investors as both domestic and global developed markets performed exceptionally well. Emerging markets, in contrast, were mostly flat. We attribute this weakness to the strength of the US Dollar. Unlike equities, the bond and commodity indices we follow were weaker for the month.
U.S. & International Stock Index Returns
|Index March 2021 Year-to-Date|
|Dow Industrials 7.26% 8.32%|
|S&P 500 5.55% 7.02%|
|S&P 400 (Midcap) 6.57% 14.79%|
|S&P 600 (Small Cap) 5.51% 19.78%|
|MSCI World 4.27% 5.64%|
|MSCI EAFE 2.55% 3.54%|
|Bloomberg Agg. Bond (3.28%)|
|CRB Commodity Index 11.27%|
|US Dollar Index 3.39%|
All data as of 04/01/2021, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
“Skepticism and pessimism aren’t synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.” – Howard Marks
One of the great things about watching the markets is that there is never any certainty to what is going to happen next. Sure, we can make predictions – just turn on the tv between 6 am and 7 pm Monday through Friday and you can hear them ad nauseum!!! All a prediction is, however, is a guess at what is going to happen. An educated guess, maybe, but Marty McFly and his newspaper from the future doesn’t actually exist.
Often times we can get the what is going to happen correct but get the conclusion wrong. Like, stock XYZ is going to have a great first quarter earnings report and the uptrend it is in will accelerate. Then XYZ reports a blowout number and … stock drops 3% on the news. How did THAT happen? WHY did that happen? That is NOT SUPPOSED TO HAPPEN!!!
While this happens to all of us at one time or another, experience helps us make well informed decisions (assuming one learns from the past). Time around the markets allows one to think more like the market; handicap the likelihood for different outcomes of the same event. This leads us to …
Is a Stock Market Correction on the Horizon?
This is almost the exact heading we used in this exact spot of this letter last month. It is certainly a valid question after a really good first quarter for the stock market. Chart #1, which we posted a month ago, suggested that a correction was a real possibility. Add in the combination of strength of the US Dollar and higher bond yields, and it was reasonable to question the short-term validity of the bull market. The whole scenario suggested it could very well be time for the stock market to take a breather.
That didn’t happen. Chart #2 shows the S&P500 bouncing around but moving higher toward new record highs, not lower toward support levels. This is one of those times where the setup you thought was there turned out to be incorrect. Can’t always be right, but you can be nimble. As we often tell clients and prospects, when the facts change our opinions change.
Ironically, not much has changed even as our thoughts on the market direction have. Right now we see the following:
- Bonds are still not catching a bid with yields trending higher and the Aggregate Bond Index down 3.28% for the first quarter
- The Utilities and Staples sectors have started to perform better, which often happens when the stock market is weak
- Technology stocks and other 2020 high flyers have “corrected,” substantially in some cases
- A relative strength breakout of mid-cap and small-cap stocks vs. large cap stocks since October 2020 pulled back in March (Chart #3)
Does This Mean the Stock Market Rally is Over?
Maybe. Possibly. But probably not, in our opinion.
As we mentioned above, right now there are some real issues that can cause the stock market to move lower. And maybe in the short term this will be true. But there are a number of positives out there as well. Only time will tell.
Of course, getting to “no” is always an easy thing to do. Moreso for those of us with a cognative bias toward the negative. There’s always an excuse why something can’t happen. Heck, we know people who gave us all kinds of reasons why the stock market rally was done in 2013 as the S&500 approached the previous high of 1565. Didn’t really work out as they thought.
Back to the topic at hand, when you look out past the next week or month there are some really positive things happening for stocks. Value stocks, for example have started to perform well after years of underperformance. Value, history tells us, tends to do better when there is economic growth and/or inflation. According to JP Morgan Chief Economist Dr. David Kelly, inflation is expected to be 2.2% and real GDP growth rising 6.5%. That fits our definition for both inflation and solid economic growth.
Keep in mind that the recent underperformance of growth stocks in the first quarter does not necessarily mean their day in the sun is over. Technological advances continue to happen, creating wealth for shareholders. The innovations trend is likely to accelerate if the infrastructure bill proposed by the Biden Administration comes to be in something close to what is proposed. Two trillion (or something close to it) over 10 years invested into buildout and new technological research has the potential to be a huge boom for economic growth. The benefits will likely show up the stock market.
The rise in interest rates, mentioned earlier as a negative, might not be such a bad thing. Rates are higher, yes, but not high by our definition. Even after the runup of more than 1%, current yields on the 10-year Treasury are right about where they were prior to the pandemic.
For the stock market indexes to continue the current uptrend it will have to come from growth across many sectors, not just one or two areas of the market. Last year the jet fuel of market gains came from growth stocks – technology more specific- as the pandemic had an effect on where earnings growth was located. With the expansion of economic growth, earnings are expected to be much more broad-based in 2021 and 2022.
It has been a while, but we shouldn’t forget that growth AND value can move higher at the same time. Small and mid-sized companies can grow at the same time as larger companies. International markets can be bullish at the same time as domestic markets.
Given the combination of the current prospects for growth in next few years and the rapid expansion of technological development we continue to be bullish for the long term.
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Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
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Jonathan D. Soden, Managing Partner Jon.Soden@wfafinet.com
Jeffrey T. Bogert, Partner
Robert I Cahill, Partner Rob.Cahill@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Associate Financial Advisor Jay.Knight@wfafinet.com