In an In-Between Period

When we looked at equity markets for February, we’ve got to consider that we came off an exceptional 2020.  Markets were up about 16% for the full year, despite all the noise, and despite all the concerns of a recession.

But in February we had equity markets up around 2%, and they’re also up around 2% the same level for 2021 so far. When we think about what happened under the covers, it wasn’t just as simple as broader equity markets doing well. We really had the first half of February with equity markets up quite strongly, up around 6%. And in the back half we saw a sell-off, with equity markets coming back around 4%.

There’s a lot at play here, there’s a lot of volatility creeping into markets. Because we’re really in this period now of in-between. In-between that transition of a COVID world, and the world is now trying to think about what is that pathway back to normal, as we start to reopen our economies.

When we think about the key themes in markets at the moment, investors are really focused on earnings, the virus, and interest rates. We think about earnings, we have the US reporting season, that was overwhelmingly positive. We had around 80% of companies beat expectations, and the beat-to-earnings consensus was about 16%. And that was very strong, but broadly anticipated as markets had moved well ahead of that in 2020.

On the virus front we’ve seen daily cases come down, really about 70% lower than where they were at the peak. But there’s a focus still on, will we get a mutation in the virus? And also, some pockets of Europe we’re actually seeing daily cases increase. And the third one is certainly interest rates, which have risen throughout the year, and that has a meaningful impact on equities, but also different pockets of the market react quite differently to lowering or rising interest rates.

When we think about one of the key themes that is really going to drive markets going forward, it is really interest rates. Interest rates have been rising quite aggressively in 2021, expanding from around 90-basis points1, this is the US 10-year bond yield at 31 December 2020. And now we’re upwards around 1.4%, even climbing higher after February.

That is what actually drove more of that style rotation from growth to value. And it’s also the market anticipating inflation, heading into 2021. Economies accelerating economies, and even the consumers and companies doing much better with all this excess liquidity and stimulus.

This is something that we think we really need to keep an eye on, what level inflation will eventually come through? And what pressure does that put on central banks to rise or raise rates, and will they be able to really keep rates at the lower level, which they’ve committed to for a number of years from here?




1 31 December 2020

About Sam Ruiz

Sam Ruiz is a Portfolio Specialist in the Equity Division at T. Rowe Price, representing the firm's global and Australian equity portfolio managers to clients, consultants and prospects.

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