Monthly Market Update for February 2021

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Please find the next blog in our monthly series that provides a review of the prior month’s market data, the state of the economy, and the global financial markets.

Global Economy:

February markets were dominated by a sharp rise in bond yields and the corresponding fears that those increasing yields will challenge equity valuations. US Treasury yields were pushed higher by the outlook of a heating up economy and a rise in inflation as recent weeks have seen strong gains in retail sales, industrial production, new home sales, and orders for durable goods. Fiscal policy also supports the growth outlook, as the US House passed another virus relief bill at month-end. The measure will now move to the Senate. On the virus front, the FDA approved a third vaccine for distribution, and maker Johnson & Johnson has stated they can provide an additional 20 million doses by the end of March. Covid-19 infections and hospitalization rates fell throughout the month, yet new virus variants continue to circulate, and experts fear these could cause a fourth wave in the coming weeks.

The Federal Open Market Committee did not officially meet in February. Fed officials continued to voice support for dovish policy as rates rose in February, although Chairman Powell also gave no indication that the central bank would take action against rising rates. He stressed patience, noting labor market weakness, and reaffirmed intentions to keep rates at zero until the economy has recovered from the pandemic. The Fed also remains dedicated to its current rate of asset purchases of $120 billion per month, and the bank’s balance sheet expanded to $7.5 trillion in February.

The second estimate of 4Q-20 real GDP indicated the US GDP expanded at a rate of +4.1% annualized with upward revisions to residential fixed investment, private inventory investment, and government spending. For the calendar year 2020, there was a decrease in real GDP of -3.5%. The Atlanta Fed’s quantitative GDP model currently forecasts a robust 8.3% growth for 1Q-21, while analysts’ consensus estimates average roughly 3%.

Weekly initial unemployment claims declined in February but remain at a higher weekly level than before the winter surge in virus cases. Monthly employment figures exceeded forecasts as employers added 379,000 jobs in February and unemployment fell to 6.2%. Leisure & hospitality, a sector which has seen volatile employment changes amid the pandemic, saw the largest gains with 355,000 jobs added. The economy is still down 9.5 million jobs since February 2020. Core CPI declined to +1.4% year-over-year, while the FOMC’s preferred measure, Core PCE, held steady at +1.5% year-over-year through January.

Global Markets:

Returns for major equity indices were positive in February, lifted by optimism for economic growth. The S&P 500, which represents large US-based entities, returned +2.8% for the month. Rising rates triggered a rotation away from defensive sectors and IT and into sectors which stand to benefit from reopening. Energy (+21.5%) and Financials (+11.4%) were the largest beneficiaries while Utilities (-6.5%) and Health Care (-2.2%) lagged. The Russell 2000, representing small cap stocks, was the top performing broad equity index at +6.2%. Sector performance lined up similar to US Large Caps as Energy (+23.8%) and Financials (+11.7%) outperformed with Health Care (+1.3%) and Utilities (-1.9%) the laggards. Value significantly outperformed growth across the market cap spectrum.

In the broad international developed markets, the MSCI EAFE index returned +2.3% for the month and experienced the same sector rotation as US equities. Energy (+9.9%) and Financials (+8.7%) were the top performers with Utilities (-5.2%), Health Care (-4.1%), and Consumer Staples (-4.0%) trailing. Among developed countries, Italy (+5.7%), Spain (+5.2), and France (+5.0%) were the top performers, with New Zealand (-10.7%) and Portugal (-3.9%) lagging and most others generally in the +1.0% to +4.0% range.

Emerging market stocks, as represented by the MSCI Emerging Markets index, underperformed their large cap developed market counterparts at +0.8%. Argentina (+11.0%), Chile (+8.0%), and Peru (+7.3%) were the best performers in the month while Brazil (-14.0%), Pakistan (-12.0%), and Kuwait (-4.0%) lagged. China, at nearly 40% of the index, returned -1.0% for the month.

Real estate, as measured by the FTSE EPRA/NAREIT Developed index, outperformed large cap equities with a +3.9%return. The energy-related Alerian MLP also outperformed other equities at +7.8%. The near-month NYMEX oil continued to rally with a robust +17.8% and has recovered to pre-pandemic levels. Gold was down -6.4% and is off around 20% from August 2020 highs. The diversified Bloomberg Commodity index climbed +6.5% and has a +20.3%trailing one-year return.

The US Treasury curve steepened as intermediate- and longer-dated maturities rose dramatically on the prospects of future growth and inflation. The 10-year and 30-year treasury yields each closed at their highest level in over a year, and the overall UST complex had a negative return for the month at -1.8%, with trailing one-year returns at -0.1%. Sovereign yields outside of the US were also sharply higher, and the global stock of negative yielding debt fell by over $4 trillion in January to $12.7 trillion.

The BloomBar US Aggregate Bond index outperformed risk-free US Treasuries on an absolute and duration-matched basis. The benchmark lost -1.4% in February, with 12-month performance of just +1.4%. While supply was heavy, demand was supportive of corporate credit spreads, which tightened 7 bps to fully recover from pandemic-era widening. With higher US Treasury yields offsetting moderately tighter spreads, the benchmark’s yield-to-worst rose 25 bps to 1.42%.

The BloomBar 1-15-Year Municipal index returned -1.3% in February for its worst month of performance since March 2020. Demand waned, and municipal/treasury ratios retreated from their recent all-time tight levels. Overall, pandemic-related damage to state and local government budgets has not been as bad as initially feared, and credit ratings have been relatively stable. The stimulus plan before the Senate includes $350 billion in aid to help state and local governments address budget shortfalls.

The BloomBar US Corporate High Yield index returned +0.4% for the month. Supply was heavy, but strong corporate earnings and higher oil prices were supportive of spreads, which tightened 36 bps. All-in yields declined 7 bps to 4.24%. Bank loans outperformed other bond categories in the month as investors seeking out enhanced income and floating interest rates have led to strong inflows for the category. Emerging market bonds tracked with less-risky fixed income benchmarks to post negative returns for the month amid a global rise in interest rates.

Disclaimers:

The views expressed herein are those of Asset Consulting Group (ACG). They are subject to change at any time. This report was prepared by ACG for you at your request. Although the information presented herein has been obtained from and is based upon sources ACG believes to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of that information. Accordingly, ACG does not itself endorse or guarantee, and does not itself assume liability whatsoever for, the accuracy or reliability of any third party data or the financial information contained herein. Certain information herein constitutes forward-looking statements, which can be identified by the use of terms such as “may”, “will”, “expect”, “anticipate”, “project”, “estimate”, or any variations thereof. As a result of various uncertainties and actual events, including those discussed herein, actual results or performance of a particular investment strategy may differ materially from those reflected or contemplated in such forward-looking statements. As a result, you should not rely on such forward-looking statements in making investment decisions. ACG has no duty to update or amend such forward-looking statements. The information presented herein is for informational purposes only and is not intended as an offer to sell or the solicitation of an offer to purchase a security.

Please be aware that there are inherent limitations to all financial models, including Monte Carlo Simulations. Monte Carlo Simulations are a tool used to analyze a range of possible outcomes and assist in making educated asset allocation decisions. Monte Carlo Simulations cannot predict the future or eliminate investment risk. The output of the Monte Carlo Simulation is based on ACG’s capital market assumptions that are derived from proprietary models based upon well-recognized financial principles and reasonable estimates about relevant future market conditions. Capital market assumptions based on other models or different estimates may yield different results. ACG expressly disclaims any responsibility for (i) the accuracy of the simulated probability distributions or the assumptions used in deriving the probability distributions, (ii) any errors or omissions in computing or disseminating the probability distributions and (iii) and any reliance on or uses to which the probability distributions are put. The projections or other information generated by ACG regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Judgments and approximations are a necessary and integral part of constructing projected returns. Any estimate of what could have been an investment strategy’s performance is likely to differ from what the strategy would actually have yielded had it been in existence during the relevant period. The source and use of data and the arithmetic operations used for calculating projected returns may be incorrect, inappropriate, flawed or otherwise deficient.

Past performance is not indicative of future results. Given the inherent volatility of the securities markets, you should not assume that your investments will experience returns comparable to those shown in the analysis contained in this report. For example, market and economic conditions may change in the future producing materially different results than those shown included in the analysis contained in this report. Any comparison to an index is for comparative purposes only. An investment cannot be made directly into an index. Indices are unmanaged and do not reflect the deduction of advisory fees. This report is distributed with the understanding that it is not rendering accounting, legal or tax advice. Please consult your legal or tax advisor concerning such matters. No assurance can be given that the investment objectives described herein will be achieved and investment results may vary substantially on a quarterly, annual or other periodic basis. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.

Gryphon Financial Partners shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Gryphon Financial Partners, LLC is an Investment Adviser.

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