We noted last week that February macro data had decelerated and that market signals in March had shifted to favoring defensive assets. After reviewing several data points, we concluded that the trends still seemed to be positive. One week is not a long enough period to determine if February was a false signal, but the direction of information last week was positive.
On the economic side, the final March manufacturing PMI data was released, and the ISM series increased to the highest level since December 1983. The subcomponents were also strong, with employment, production, and new orders each increasing. Supply chain issues continued to cause backlogs along with delays in deliveries, which is leading to price increases. The Markit series has a shorter history but also increased to the second highest level on record and reported similar trends in demand and pricing.
This data suggests that growth and inflation should continue to increase in Q2 2021 and the weakness in February was likely not the start of a new trend towards slower economic growth.
Another data point from March that suggested economic activity will likely continue to accelerate was the monthly payroll report. Total payrolls increased by 916,000 and the prior two months were revised higher by 156,000. The largest gains came from areas that have been most impacted by COVID, with Leisure/Hospitality +280,000, private education +64,000, and local government (mostly schools) +136,000. Construction increased by +110,000, which is another sign that the weakness in February may have been more about the weather.
On the market side, while it was a holiday shortened week, the signals were positive. Some of the mega-cap companies that had been lagging increased last week, which helped the performance of industries like Technology, Consumer Discretionary, and Communications. The worst performing industries were Utilities, Health Care, and Consumer Staples.
Some of the best performing subindustries last week were related to commodities and semi-conductors.
Source: S&P Capital IQ and MSCI, Inc. (GICS), NDR Multi-Cap (Universe).
From an equity factor standpoint, momentum, high beta, and growth outperformed low volatility, low beta, and defensive.
Oil and commodity prices recovered last week and outperformed the Aggregate Fixed Income index.
The VIX equity volatility index declined last week and closed below 18.
Oil volatility also continued to decline and ended the week at 40.
The most consistent positive market indicator continues to be the high yield market, with spreads declining again, and are now at the lowest levels since 2018.
We will continue to measure and map the economic and market data for signs of a change in direction of the positive trends we have been highlighting since November 2020. For now, the weakness in the February data and the March market signals continue to look temporary and are likely not a sign of a change in trend.
Vice President, Research and Strategy
Boyd Watterson Asset Management, LLC
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.