Investor Optimism Improves on Rate Stabilization

March 26, 2021

Optimism returned to the market this week on improved investor sentiment surrounding the U.S. economic reopening, on 10-year U.S. treasuries retreating from recent highs and as the Federal Reserve dished out some positive news for the banking sector. Travel-related stocks such as airlines and cruise ships helped move markets higher on growing optimism that the economy is on the verge of a complete opening. As of Thursday, 70% of Americans 65+ have received at least one dose of the Covid vaccine. The vaccination rollout is expected to move into overdrive in the coming weeks with dozens of states opening vaccinations to all adults. With the nation averaging about 2.5 million shots per day, that should help stem the recent rise in daily new coronavirus cases seen over the last few weeks. Bond investors also got some good news this week as 10-year treasury yields fell to 1.67% from a recent high of 1.75%. The rate moves also benefited growth stocks with investors scooping up recently battered names. Bank stock investors also cheered the Federal Reserve’s announcement that it would relax regulations on the banking sector by reducing pandemic limits on buybacks and dividend increases, commencing in July. That should help attract more investors into banking stocks which should experience healthy gains as demand for credit increases. The positive developments drowned out the week’s soft data on personal income and spending and existing home sales. Overseas, the Eurozone returned to growth for the first time in months amid strong manufacturing gains. For the week, the Dow Jones Industrial Average finished up 1.36%.

Personal Income and Spending Slide

Personal income fell -7.10% in February, reversing January’s 10.10% increase. The month-over-month drop was due to the second round of stimulus checks reaching recipients in January, inflating personal income figures for the month. Meanwhile, consumer spending also slipped in February, falling -1.00% compared to January’s 3.40% rise. The decline was driven by brutal winter storms which hindered consumers from getting out and about. The harsh weather not only hit consumers but also depressed homebuilding, factory production, and orders and shipments of manufactured goods. On a more positive note, inflation remained tame with the personal consumption expenditure (PCE) price index, excluding volatile food and energy, rising 1.40% year-over-year (yoy). That’s in line with January’s 1.50% yoy gain. A number of one-time items made the comparables for this set of data less relevant and with the spring thaw now in full gear and with consumers flush with cash, spending is poised for a strong second quarter rebound.

A Tale of Two Real Estate Markets

Existing homes sales fell -6.60% in February as the supply of homes on the market experienced its largest annual decline ever. Year-over-year, homes available for sale were down -29.5% to 1.03 million homes. At the current sales pace that amounts to a two months supply. By comparison, six to seven months is considered a healthy balance between supply and demand. Even more shocking is the fact that there are now almost twice as many real estate agents as there are homes for sale. The tight supply and competitive market pushed the median price up 15.8% yoy to $313,000. Although sales were down overall, the higher end of the market continued to attract buyers. Sales of homes priced above $1 million were up an eye-popping 81% from the year ago period. Meanwhile, homes priced between $100,000 and $250,000 saw sales decrease -11%. As we enter the busy homebuying season, the lower end of the market will struggle with volume given the tight inventory and rising prices but the higher end of the market should see further gains, supported by an improving labor market, strong household balance sheets, and low mortgage rates.

A Eurozone Returns to Growth but Struggles to Maintain Momentum

Despite continued lockdowns, a slow Covid vaccine rollout, and a surge in coronavirus cases, the Eurozone actually managed to return to growth for the first time in months in March. The IHS Markit Eurozone Composite PMI rose to 52.5 in March from 48.8 in February. Numbers above 50 indicate expansion, while numbers below 50 indicate contraction. Business activity was driven by a jump in manufacturing PMI to 63 in March from 57.6 in February, the index’s highest level since June 1977. Gains in manufacturing more than offset weakness in the services sector. The gains may be short-lived, however, as the bloc attempts to beat back another surge in coronavirus cases with new lockdown measures that will have a disproportionate impact on the service industry.
Investor optimism returned this week on hopes for a strong reopening for the economy, tame inflation data, and stabilizing bond markets. The Street was quick to brush off the week’s soft batch of economic data, confident it was due to one-off events and that the Fed’s low interest rate policy and continued fiscal stimulus will ramp things back up in short order. Things certainly seem to be shaping up for a strong spring rebound now that consumers are flush with cash from another round of stimulus checks earlier this month, as labor markets continue to improve, and as talks remain underway for another infrastructure package to pump even more dollars into the economy. Even bond investors got something to cheer about this week as treasury yields fell, pushing bond prices higher. Next week will be a shortened trading week due to Good Friday and the Easter weekend, which will be light on data, and investors should not have much to fret about, aside from the potential disruption to the oil markets from a boat being stuck in the Suez Canal.  
The Week Ahead

Markets will be closed on Friday, April 2nd, in observance of Good Friday. Week in Review will return on April 9th with the latest ISM Manufacturing and Non-Manufacturing figures. In overseas action, China releases composite PMI numbers.

To our Friends and Clients

This past year has been described as challenging, tumultuous, and stressful, to say the least. I don’t think many of us would have ever imagined living through this experience. However, some have also described this season as a time to slow down, to count our blessings, and to find joy in small moments.

In the midst of all of the uncertainty, one constant has been the value of personal and professional relationships. We want to thank each of our clients for your trust and confidence in us, for being a blessing in our lives, and for letting us be part of yours. We continue to be inspired by our clients’ commitment to achieving long term financial goals, particularly throughout such turbulent times. Despite the heartache caused by the pandemic, many individuals and families have used this time to reevaluate what is important — both personally and financially. Our advisors have continued to help clients tackle financial planning and estate planning tasks for themselves and for their families, providing families with peace of mind and confidence about their future and their legacy.

The last twelve months have shown us that unexpected events really do happen in life. It is heartening to see firsthand how, as humankind, we possess an incredible capacity to adapt and yet still thrive in response to change at all levels.  The world is undoubtedly a different place than it was just last March. There have been massive shifts in our priorities and goals, both in our daily lives and our businesses. These will need to be met with a new set of planning techniques — specific to these new goals at this specific moment in time.  As such, it seems only appropriate that we should emerge from this event during the springtime, a season characterized by repair and new growth, and address these challenges and opportunities. Our entire staff is committed to serving you and refining your financial plans as we embark on this new phase together.

We are filled with hope and optimism that we will soon be able to safely see more of you in person. With precautions to maintain the health and safety of our associates and our clients in place, our team of advisors, analysts, and client service professionals are continuing to serve our clients with a variety of financial planning and wealth management needs –- both virtually and in-person. Helping you achieve your goals has always been ours, and we are available to address any questions or changes that may have arisen over the past year.

Best wishes for health and happiness on the road ahead,

Porter L. “Buddy” Ozanne, III, AEP®, ChFC®





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