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February 2021 in Review

Daniel Zeigler, CFP, CMFC, Portfolio Manager

 

Hi everyone, this is Dan Zeigler, Portfolio Manager at Midland Wealth Management. I wanted to provide everyone with a recap on the markets for the month of February. 

The equity markets were off to a great start in February until this last week, as equity markets sold off sharply, led by the big Technology names, which were down 4.9% this last week. So what has led to this increased market volatility, especially as the economy continues to get closer to reopening later this year? 

First, long-term interest rates have risen sharply in 2021 so far, with the yield on the 10-year Treasury bond climbing from less than 1% at the beginning of the year to an intraday high of 1.61% in February, which is the highest level in a year. 

Yields are beginning to rise as we continue to see better news on the pandemic, encouraging economic data for the first quarter, and rising prospects for another fiscal stimulus in March. Bond investors are worried about all of this positive news will bode well for future economic growth and could lead to higher inflation, which may increase the probability of the Federal Reserve shifting policy sooner than expected, by either reducing bond purchases or even raising rates.

In the long-run, higher interest rates are certainly a good sign as they are showing the economy continues to improve. However, the speed of the increase is causing some increased volatility and we are seeing some stocks reprice to reflect a higher interest rate environment. Higher yields can be negative for highly valued equities as their valuations are more difficult to justify, which is the area we have seen the most volatility. 

The days of just buying any of the market leaders regardless of their valuations may be drawing to a close. Investors now must recognize there are alternative opportunities out there, including cyclical stocks that have underperformed, as well as slightly more attractive bond yields. 

Despite the increased volatility, the S&P 500 is still only 3% from an all-time high and still had a positive return of 2.5% for the month. Both value stocks and small-cap stocks continue to be the big winner so far this year, with small-cap stocks up close to 11% this year. 

All eyes will be on the jobs number this week. If the jobs number is better than expected, we could see yields continue to go higher and stocks may continue to readjust to a higher interest rate environment. Thanks for joining me today on the month’s market recap. 
 

Midland Wealth Management is a trade name used by Midland States Bank, its subsidiary Midland Trust Company and its affiliate Midland Financial Advisors, an SEC registered investment advisory firm. Investments are not insured by the FDIC or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank or any federal government agency, and are subject to risks, including the possible loss of principal.