A Rough Patch of Road

Post On: March 10, 2021

Posted In: COVID-19 Market Update

March has gotten off to quite the rough start. Last week, the S&P 500 fell 1.5%, and the Dow Industrials dropped 0.12%. Most notably, the Nasdaq plunged almost 5% in four days, as technology and health care stocks were under fierce pressure.

 

Our portfolios, which hold many technology and health care companies, had a difficult week as well. It is times like these that test our patience and discipline. We are reminded in James 1: “Consider it pure joy, my brothers, when you are involved in various trials, because you know that the testing of your faith produces endurance.”

 

We are certainly being tested! Yet, remember that losses exist only on paper if we don’t sell out of our positions. We anticipate a bounce back in the near future, so don’t get too down over this current rough patch.

 

First, let’s look at what caused the sell-off, and then examine what usually follows. The selling pressure this past week came from the continued fears over rising bond yields. The sell-off picked up steam after the Federal Reserve Bank (the Fed) commented that it would keep easy money policies in place for the foreseeable future. These policies have led to a weaker dollar, which in turn have led to higher commodity prices and inflation.

 

In 2021 alone, a “basket” of commodities including oil, copper, agriculture, and other metals is up 18%. The same “basket” is up 25% over the past year! The Fed has been in denial that inflation is a problem, because its figures exclude food and energy, two items we all spend a good portion of our income on.

 

After the Fed’s comments this past week, the 10-year Treasury hit 1.57%, while the 30-year yield hit 2.3%. Typically, rising rates have a harsh impact on interest rate sensitive value stocks (like financials and utilities). Surprisingly, growth and momentum stocks (technology, consumer discretionary, and health care) took it on the chin this time around.

 

This should be a short-term phenomenon. Typically, during a rising rate environment, growth stocks represent a more attractive investment, as they exhibit accelerating earnings and sales. So we still view this dip as a major buying opportunity. As we mentioned over the past few weeks, we were expecting a pullback during the first part of March, and we are anticipating a stronger second half of the month.

 

As we move into the end of the first quarter, there is typically higher demand for stocks from pension and institutional buyers. Additionally, analysts usually start revising earnings estimates later this month prior to first quarter earnings season starting mid-April. So far, according to FactSet Research, earnings have increased, on average, by over 5%. Higher earnings tend to lead toward higher stock prices.

 

These two factors should help boost stocks, as we head into the end of March. It’s not fun to be an investor during these rough patches, which could continue for another week or two. However, the silver lining is that we are heading toward springtime, a season of warmer weather and, generally, healthier stock prices. Hold tight.

 

Sources: Yahoo Finance, Reuters.com, and JP Morgan Market Insights

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.
This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Information has been obtained from sources believed to be reliable and are subject to change without notification. The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation. Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status and risk tolerance. Past performance is not an indication of future results. Investments involve risk and the possible loss of principal.

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