Watch the CPK Market Action Report: March 2021
After a fast start to the month, stocks quickly reversed direction as bond yields surged inducing fears of inflation. Will the markets be able to digest these concerns and retain their resilient upward trend or will the quick rise in bond prices prove to be too much to handle?
Watch the full 3-minute Market Action Report now:
March 2021
After a fast start to the month, stocks quickly reversed direction as bond yields surged inducing fears of inflation. Will the markets be able to digest these concerns and retain their resilient upward trend or will the quick rise in bond prices prove to be too much to handle?
That actions starts, NOW!
INDEX PERFORMANCE RECAP – (Use the charts for each index as usual)
Markets started off the month aggressively but that all started to fade quickly as the ten-year treasury suddenly started to rise aggressively in the middle of the month. Even so, the Dow Jones Industrial closed up 2.92% and the S&P 500 was up 2.14%. However, the Nasdaq Composite was down .26%.
EQUITY UPDATE
Equities definitely experienced some collateral damage this month. I do not believe the sharp rise in the ten year is going to be a bearish game changer as the historic fed easing, massive fiscal stimulus, vaccine optimism and no signs of a double dip recession are all still intact. However, I do believe the surge in yields may cause air pockets in stocks and near term pull backs ultimately increasing overall trading volatility.
BOND UPDATE
As I stated last month, higher bond yields was the biggest threat to the current market rally. February proved that to be true as bond yields surged higher causing concern that central banks could become less dovish or that the rise in yields could jeopardize the economic recovery. The 10-year Treasury was up 34.81% piercing through a two standard deviation move. A two standard deviation move equates to about 36 basis points. Historically, this has caused equity market volatility. If yields continue to rise, we should expect to see continued weakness in equities that might bring us a 10-20% pullback.
COMMODITY UPDATE
Commodities were largely higher for the month. Crude oil rallied to fresh 52-week highs closing out the month up just over 19% as it continues a recovery from the bear market in early 2020. As the reopening of the economy continues to move forward and with lagging global production, the oil rally should extend its move higher into the $60s.
In metals, Copper rose to fresh 10-year highs by closing up just over 15% for the month. This move is a strong indication as to the strength behind the reopening of the economy. The outlook for copper remains bullish.
Surging yields also impacted gold as is it dropped just over 6% hitting multi-month lows. The rise in bond yields is simply too great for the precious metal to overcome. Gold will most likely continue to selloff until we see some sort of stability in bond yields.
CURRENCY UPDATE
The dollar closed out the month virtually flat but not before dipping below 90 for the first time since early January. Comments from Jerome Powell confirming the Fed’s commitment to stimulus triggered the selloff as it reminded the markets that the US was more committed to stimulus than any of the other developed countries. As I noted last month, this will make it difficult for the dollar to rally in the near term and present a positive for stocks.
ECONOMIC UPDATE
Key economic data has been good enough to avoid concern that there will be a double dip recession but not so good that it reduced the need for stimulus. Jerome Powell stated that the U.S. is “still very far from a strong labor market” suggesting the Fed will continue to remain extremely dovish for the foreseeable future. So, as long as the data continues along its current path avoiding an additional spike in bond yields, the S&P 500 should be able to carry on with its rally.
GEOPOLOITCAL UPDATE
Biden met with a group of Republicans early in the month about the next relief package. Republicans proposed a roughly $600B package that Democrats think is just too small prompting House Democrats to move forward with proposing and ultimately passing their initial $1.9T bill. However, changes are likely if the bill is to get passed in the Senate.
THE WRAP
The bulls are still assuming that we will have a historically dovish Fed, massive stimulus and rapid Covid declines. As long as this all remains intact and the bond yields can find solid footing at their current levels, then cyclicals and value will outperform in the coming months. However, we will definitely keep a close eye on the potential risks so investors can be prepared for air pockets like we saw at the end of February.
CPK FOCUS
For the month of March, our models are now holding only 20% cash. Our broad focus has also changed to domestic equities and now commodities.
Domestically, our attention is on small cap growth, mid cap growth and small cap blend with favored sectors of energy, consumer cyclical and technology.
As for commodities, our attention in on energy and industrial metals.
CPK DISCLAIMER
As a reminder, my current allocation is not a recommendation. Regardless of what happens next, investors like you need to have a simple and yet solid financial plan that reduces RISK, COSTS and TAXES while securing the necessary income you need to maintain your lifestyle throughout retirement.
If you don’t have a plan OR you’re not comfortable with the plan you have, call me today to get pointed in the right direction.
I’m Chad Kunc and that puts a wrap on the March 2021 Market Action Report. Thanks for joining me. It’s time for me to get back to the markets.
And that action starts, NOW!