The Bottom Line
● Major U.S. equity indices slid this week, as the S&P 500 and the Nasdaq Composite both fell ‐0.8% and the Dow dipped ‐0.5%. Small caps, which have outperformed this year, saw heavier profit taking with a ‐2.8% decline.
● February economic data was negatively impacted by the severe winter weather across much of the U.S. as retail sales, industrial production, and housing starts all came in far under forecasts. But strong regional factory data in March signals the February softness was likely temporary.
● Economists and investors are increasingly optimistic about the economy and the Fed shares that view, yet isn’t ready to shift away from an easy‐money stance.
Investors fear inflation as top risk
For the first time in over a year COVID‐19 isn’t the top “tail risk” for respondents in Bank of America’s monthly survey of 220 global fund managers. Both “Higher than expected inflation” and “A ‘tantrum’ in the bond market” are now bigger concerns than COVID‐19. Nonetheless, managers remain bullish with a record amount of survey respondents “Expecting Stronger Economy”, which topped 80%, and the highest ever percentage saying “Global Profits Will Improve” at 89%. On Wednesday, the Fed probably encouraged these responses even further. In its second Federal Open Market Committee (FOMC) meeting of the year, Fed officials reported seeing improved GDP growth of 6.1% in 2021, up from the December’s assumption of 4.2%, and projected the unemployment rate will fall to 4.5% by year‐end, down from the prior 5% forecast. Inflation will hit 2.4% this year, the committee predicted, notably higher than the December 1.8% estimate. Despite the upgraded projections they reiterated their accommodative stance saying they will maintain the current pace of bond buying and expect no rate hikes before 2023. Yields moved higher afterwards and the 10‐year US Treasury yield ended the week at 1.72%.
Digits & Did You Knows
STOCKS AND HIGH INFLATION — During the 15 highest inflation years, using the Consumer Price Index (CPI) as the benchmark, over the last 100 years, i.e., 1921‐2020, the S&P 500 Index has been “up” 7 years and “down” 8 years. The index’s average performance for the 15 years is +2.5% per year total return (source: BTN Research).
POLITICAL PARTY AND INFLATION — In the last 100 years (1921‐2020), Republicans have a 52‐48 edge over the Democrats in “years n the White House.” Inflation(using the CPI) has been +1.9% per year during the Republicans’ 52 years, while inflation has been +3.4% per year during the Democrats’ 48 years (source: DOL, BTN Research).
Source: Bloomberg. Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange‐traded funds recommended by the Prime Capital Investment Advisors. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High‐YieldBond(iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 ValueETF);MidGrowth(iSharesRussell Mid‐CapGrowthETF);MidValue (iSharesRussell Mid‐Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares U.S. Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by: 30% U.S. Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4%Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
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