A stronger-than-expected batch of data last week helped paint a brighter path forward for the ongoing economic recovery. Durable goods orders, which improved at the fastest rate in six months, and stronger core capital goods orders pointed to robust business investment. Additionally, initial jobless claims fell to their second lowest level since March 2020, consumer confidence ticked higher and the personal saving rate jumped to 20.5%.
While stronger economic data is good news, it has also contributed to a sharp rise in longer-dated U.S. Treasury yields and fueled ongoing concerns about an inflation shock and the Federal Reserve’s (Fed’s) ability to respond. Throughout last week, several Fed officials continued to downplay adjustments to monetary policy in light of higher yields and pushed back on fears of inflationary shocks due to further proposed fiscal stimulus and pent-up consumer demand. In our view, market volatility will remain elevated as investors become extremely focused on gauging the Fed’s reaction.
Domestic equities declined for the second consecutive week, the first such occurrence since the two weeks leading up to the election. Hampered by spikes in both interest rates and commodity prices, smaller capitalization growth stocks drove losses.
Alongside these declines, market breadth of the S&P 500® has moved lower. The percentage of stocks below their respective 200-day moving average is now back to 79%, below the level on November 9, when the successful study of the Pfizer vaccine candidate was announced. Meanwhile intrastock correlations jumped on February 25 to 0.44. While that is still below the 12-month average of 0.45, it was the largest one-day spike since June 11 when the S&P 500 declined nearly 6%.
The MSCI World ex USA Index slightly underperformed domestic equities, with significant declines across most sectors. Information Technology, Health Care and Consumer Staples were the largest drags on performance, with relative outperformance from the Financials and Energy sectors.
The MSCI Emerging Markets Index trailed the S&P 500 by nearly 4%. Mirroring the sell-off in the United States, technology-related names in the benchmark saw significant declines. This led the Consumer Discretionary, Information Technology and Communication Services sectors to all decline more than 1% for the week, accounting for the vast majority of the benchmark decline.
Fixed Income Markets
Fixed income performance was broadly negative last week, extending month-to-date losses as rising government bond yields continued to drive prices lower, particularly for longer-duration indices. The 10-year Treasury yield briefly climbed above 1.5%, the highest level in a year. In corporates, high yield (HY) slightly underperformed investment grade (IG) due to a modest widening of credit spreads on the week. HY historically outperforms in rising rate environments due to lower index-level duration and the offsetting impact of higher yields compared to IG.
Chart of the Week
In tandem with the move higher in rates, the 30-year mortgage rate has climbed to 3.3%. While this level is still far below the 20-year average of 4.8%, a sustained increase in rates could work to cool housing prices after months of some of the strongest housing data on record. We would view this as part of a healthy functioning economy.