Macro Perspective

At a Wall Street Journal webinar on Thursday, Federal Reserve (Fed) Chairman Jerome Powell addressed the recent rise in longer-dated bond yields, but his message was not dovish enough to calm financial markets. While stating “our current policy stance is appropriate,” he also said, “we’re still a long way from our goals.” In our view, a notable tightening in financial conditions is more likely to prompt adjustments by the Fed versus a rise in bond yields alone.

The Congressional Budget Office (CBO) has estimated U.S. debt will equal 202% of gross GDP by 2051, nearly double this year’s level of 102%. Despite higher near-term deficits due to pandemic spending, the CBO has reassured “the risk of a fiscal crisis appears to be low.” Context over time, including the make-up of U.S. debt and that of other large economies, will help gauge the ongoing risks of debt levels this large.

Equity Markets

Domestic equities increased last week, after a “buy-the-dip” reversal emerged late in the week following a stronger-than-expected employment report. Large cap names outperformed smaller cap peers, with value outperforming growth.
The market selloff since mid-February has been much more severe on growth and smaller capitalization stocks, coinciding with the spike in interest rates. As a result, both the Nasdaq-100® and Russell 2000® Growth indices are the most oversold since last March. Considering the fundamental outlook for neither one has changed, we view this market move as an opportunity to rebalance existing allocations.
The MSCI World ex USA Index underperformed domestic equities, with the Energy, Financials and Consumer Staples sectors experiencing strong gains. However, double-digit declines in Information Technology names drove a large drag on performance despite the sector’s relatively small weight. Health Care names also saw significant declines on the week.

The MSCI Emerging Markets Index underperformed the S&P 500® as sell-offs in large technology-related names in the Consumer Discretionary and Information Technology sectors more than offset strong gains in cyclical sectors led by Financials, Materials and Energy. Health Care names were also a notable drag on performance.

Fixed Income Markets

Fixed income returns continued to be weighed down by rising intermediate and long-term interest rates, extending year-to-date losses for the major indices. Longer-duration sectors were most impacted by the rise in yields, while shorter-duration assets outperformed. In corporate bonds, high yield continued to outperform due to the offsetting impact of higher spreads/yields and lower duration at the index level. Investment-grade returns saw spreads widen modestly amid rising interest rate risks and shrinking order books in the primary market.

Chart of the Week

The U.S. economy added back 379,000 jobs in February, far more than the 200,000 expected, and the unemployment rate ticked down to 6.2%. Employment in leisure and hospitality increased by 355,000 as pandemic-related restrictions eased in some parts of the country. While 9 million jobs have still yet to be recovered from the lockdown-induced recession, we believe a combination of faster-than-expected job growth and healthy consumer balance sheets will be key tailwinds to the economic recovery.

View Chart of the Week on the full report