Markets continue to digest incremental positive economic news in most regions of the world as economies slowly reopen and distribute vaccines. The economic recovery after COVID-19 has persisted. Market participants continue to pay close attention to the new US administration’s policy agenda, which is still materializing. The Biden administration’s approach to the regulation of large tech companies and corporate/individual taxation is worth continued close attention going forward. In the short-term, focus remains on the $1.9 trillion fiscal package and the potential for additional fiscal spending on infrastructure. In February, yields on US Treasuries rose rapidly on higher growth and inflation expectations as economic data on unemployment, manufacturing, services and demand (retail sales, construction, incomes) came in better than expected and given the likely additional fiscal stimulus. Equity markets stalled as they repriced and rotated out of growth / tech stocks into value / recovery stocks in light of the advancing yields. Generally, growth stocks are expected to generate more of their cash flows further into the future than value stocks; when interest rates rise, those cash flows receive a larger discount, reducing their present value.
Overall, we remain positive on equity market risk. The conditions that were in place to begin the year are holding steady with strong policy support in the US, vaccine deployment trending positively, and economic data remaining resilient. Momentum in equities continues to be positive, as well. No particular areas of fixed income appear to be particularly attractive with low rates and tight spreads respectively weighing on short-term bonds and high yield. We still favor commodities as demand picks up with economies reopening and as a hedge against an unexpected inflation surprise, given their positive roll yield.