February 2021 | Global Equity Markets Review
After a soft start to the year, the market bounced back strongly in February with all major U.S. indexes posting positive returns. The S&P 500 Index price return for February was 2.61% with mid cap and small cap benchmarks posting better returns of 6.67% and 7.56% respectively as measured by the S&P MidCap 400 and S&P SmallCap 600 Indexes. There was more at work here than company size as cyclical stocks continued their market leadership. Increased enthusiasm over a full reopening of the economy in coming months, aided by monetary and fiscal support in the meantime, dominates investor attitudes toward stocks.
Global equity markets performed well although not with the same enthusiasm seen in U.S. equity markets. The S&P Global BMI returned 2.77% last month but with the U.S. excluded from the calculation returned 2.23%. Similarly, emerging markets did not fully benefit from U.S. markets as the S&P Emerging BMI Index was up 1.50%. This shortfall in the month came after strong periods of outperformance in four of the past five months reaching back into 2020. February also experienced some cooling off in the Asia Pacific region along with continued weakness in the Latin America region. The bounce in the dollar, a negative for international equity returns, also contributed to the dampened results compared to U.S. markets.
Over long periods, the broad stock market rises in conjunction with earnings and dividends at roughly the same rate. When broken down over shorter periods this connection can be markedly looser as investors anticipate changes in the forward growth in earnings and dividends. This is particularly true at turning points in the economy when cyclical patterns along with monetary and fiscal influence become more pronounced. Nevertheless, it is critical in determining future returns of the stocks whenever investors are too focused on a cyclical rebound and pay less attention to the long-term relationship between stock prices and underlying fundamentals. The most popular metric of this connection is the price-to-earnings ratio which measures what investors are willing to pay for $1 of earnings. The P/E ratio is currently at the upper end of a long-term range as investors express optimism over a fully reopened economy and the subsequent rebound in earnings. This is illustrated in the graph below which measures the increase from the market bottom 49 weeks ago in both prices and earnings estimates supplied by Wall Street analysts. This perspective demonstrates the optimism of investors expecting a future rebound in earnings strong enough to justify the rebound in stock prices. While this may well come to pass, the historical perspective is a convincing case - excessive expectations are accompanied by a rising possibility of disappointment.
Positive news on vaccination levels along with the ability and willingness to return to pre-pandemic life continues to provide an upside catalyst for the economy. However, recent downside volatility in stocks suggests positive outcomes in the economy will not automatically produce a similar response if expectations are too high. Equity investors should continue to monitor equity allocation and maintain exposure in the middle of an acceptable range.
Important Notes & Disclosures
Index Returns – all shown in US dollars
All returns shown trailing 2/28/2021 for the period indicated. “YTD” refers to the total return as of prior-year end, while the other returns are annualized. 3-month and annualized returns are shown for:
- The S&P 500 index is comprised of large capitalized companies across many sectors and is generally regarded as representative of US stock market and is provided in this presentation in that regard only.
- The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance. The S&P 500 equal-weight index (S&P 500 EWI) series imposes equal weights on the index constituents included in the S&P 500 that are classified in the respective GICS® sector.
- The S&P 500 Growth Index is comprised of equities from the S&P 500 that exhibit strong growth characteristics and is weighted by market-capitalization.
- The S&P 500 Value Index is a market-capitalization weighted index comprising of equities from the S&P 500 that exhibit strong value characteristics such as book value to price ratio, cash flow to price ratio, sales to price ratio, and dividend yield.
- The Russell 3000 Index tracks the performance of 3000 U.S. corporations, determined by market-capitalization, and represents 98% of the investable equity market in the United States.
- The Russell Mid Cap Index measures the mid-cap segment performance of the U.S. equity market and is comprised of approximately 800 of the smallest securities based on current index membership and their market capitalization.
- The Russell 2000 Index is a market-capitalization weighted index that measures the performance of 2000 small-cap and mid-cap securities. The index was formulated to give investors an unbiased collection of the smallest tradable equities still meeting exchange listing requirements.
- The MSCI All Country World Index provides a measure of performance for the equity market throughout the world and is a free float-adjusted market capitalization weighted index.
- The MSCI EAFE Index is a market-capitalization weighted index and tracks the performance of small to large-cap equities in developed markets of Europe, Australasia, and the Far East.
- The MSCI Emerging Markets Index is a float-adjusted market-capitalization index that measures equity market performance in global emerging markets and cannot be purchased directly by investors.
- The S&P Global BMI sector indices are into sectors as defined by the widely used Global Industry Classification Standards (GICS) classifications. Each sector index comprises those companies included in the S&P Global BMI that are classified as members of respective GICS® sector. The S&P Global BMI Indices were introduced to provide a comprehensive benchmarking system for global equity investors. The S&P Global BMI is comprised of the S&P Emerging BMI and the S&P Developed BMI. It covers approximately 10,000 companies in 46 countries. To be considered for inclusion in the index, all listed stocks within the constituent country must have a float market capitalization of at least $100 million. For a country to be admitted, it must be politically stable and have legal property rights and procedures, among other criteria.
- The Barclay’s US Aggregate Index, a broad-based unmanaged bond index that is generally considered to be representative of the performance of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
- The Bloomberg Barclay’s US Corporate High Yield Index, which covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market.
An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Index performance used throughout is intended to illustrate historical market trends and performance. Indexes are managed and do not incur investment management fees. An investor is unable to invest in an index. Their performance does not reflect the expenses associated with the management of an actual portfolio. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. All investing involves risk including loss of principal. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. Past performance is no guarantee of future results.
Key Indicators correspond to various macro-economic and rate-related data points that we consider impactful to equity markets.
- The US 10-Year Treasury Yield (%)/bps, is the return on investment for the U.S. government’s 10-year debt obligation and serves as a signal for investor confidence.
- SPDR Gold Trust Price ($), is an investment fund that reflects the performance on the price of a gold bullion, less the Trust’s expenses.
- West Texas Intermediate, which is an oil benchmark and the underlying asset in the New York Mercantile Exchange’s oil futures contract.
- CBOE Volatility Index (Level)/% Change, which uses price options on the S&P 500 to estimate the market's expectation of 30-day volatility.
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