Global equity markets moved higher last week. In the U.S., the S&P 500 Index (S&P 500) rose to a level of 4,185, representing a gain of 1.39%, while the Russell Midcap Index moved 1.69% higher last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 0.86% over the week. International equities also gained throughout the week as developed and emerging markets returned 1.67% and 1.41%, respectively. Finally, the 10-year U.S. Treasury yield moved higher to 1.59%, declining eight basis points over the week.
Big banks were in focus last week as investors geared up for the start of earnings season. This quarter, in particular, it will be interesting to dig into the results of the financials sector as a whole. Throughout the year, we’ve discussed three potential rotations within equity markets, with Growth to Value being one of them. Year-to-date (YTD), Value is outperforming Growth 15.11% vs. 8.60%. Going back further to November 9, 2020, when the Pfizer/BioNTech vaccine candidate was determined to be 90% effective at combating COVID-19, a time when the move to Value was perhaps initiated, Value and Growth have returned 23.44% and 16.59%, respectively.
The financial sector and Value style tend to move hand-in-hand. The sector currently accounts for the most significant allocation within the Value style category, as evidenced by the composition of numerous equity indexes. Furthermore, financials are an economically sensitive sector that benefits from an uptick in economic activity and typically when the yield curve is steepening. Since the financials sector alone has returned 20.60% YTD, one might wonder if first quarter 2021 results can add credibility to that price appreciation. Before last week’s earnings updates, the financials sector was a leader in year-over-year earnings growth expectations and earnings revisions. According to FactSet, the sector is expected to be 1 of 6 that report profit margins above their 5-year average.
Thus far, banks have been delivering on and exceeding, in some cases, expectations. Here is a summary of some notable earnings per share (EPS) and revenue releases.
In general, major concerns over low-interest rates crippling revenue and the large allocations to loan loss provisions have been alleviated. Diversified banks we’re able to drive revenue growth in areas including Investment Banking, Capital Markets activity, and Wealth Management, even in the face of certain pockets of struggling consumer and commercial banking activity. In addition, economic stimulus efforts proved successful as many of these major banks have been able to release reserves set aside for anticipated pandemic-related credit losses as the fear of a wave of defaults waned.
Moving forward, JP Morgan CEO Jamie Dimon, for one, is optimistic. In a statement on Wednesday, Dimon noted, “With all of the stimulus spending, potential infrastructure spending, continued quantitative easing, strong consumer and business balance sheets and euphoria around the potential end of the pandemic, we believe that the economy has the potential to have extremely robust, multi-year growth.” The CEO’s optimism coincided with additional positive economic news last week. On Thursday, we witnessed March retail sales blowing past expectations and initial jobless claims falling nearly 200,000 from the previous weeks total to 576,000 – a pandemic-era low.
Taken together, recent news gives credence to an already accelerated economic recovery that may be sustainable for some time as the population continues to get vaccinated and COVID-19 related restrictions are lifted. As always, additional risks may arise, and we continue to encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolios through various market cycles within an appropriately diversified framework that is consistent with their growth and/or income objectives time-frame, and risk tolerance.
Best wishes for the week ahead!
Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 4/16/21. Rates and Economic Calendar Data from Bloomberg as of 4/16/21. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index, U.S. Large Cap defined by the S&P 500. Sector performance is measured using the GICS methodology.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.
Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against loss.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than the original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
Definitions
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.