March 20, 2021
Market Commentary

Equity Indices Fall as Interest Rates Continue to Rise

Market Recap Week ending 3.19.21

It was a hectic week on Wall Street that saw the major US equity indices fall as interest rates continued to rise.  All eyes were on the Federal Reserve's two-day FOMC meeting that concluded on Wednesday with a dovish statement from Fed Chairman Jerome Powell. Surprisingly, the BOJ and a few emerging market central banks announced hawkish moves in policy.  The energy sector, which has been on a tear, fell hard on the week, as did oil prices, perhaps on profit-taking and some sector rotation in front of quarter-end.  Economic data was skewed to the downside for the week, but the Philadelphia Fed Index data had a huge upside surprise. 

For the week, the S&P 500 lost 0.8%, the Dow shed 0.5%, the NASDAQ fell 0.8% and the Russell 2000 lagged with a loss of 2.8%.  The US Treasury curve continued to steepen with the 2-10 spread widening eight basis points to 158.  The 2-year note yield increased one basis point to close at 0.15%, while the 10-year bond increased nine basis points to close at 1.73%.  Gold prices rose $21.90 or 1.2% to close at $1741.50 an Oz.  Oil prices tumbled on the week, with WTI closing down 6.3% at $61.45 a barrel. 

Over the last several weeks, the dramatic rise in interest rates had Wall Street focused on the Federal Reserve's two-day policy meeting.  In the end, there was no change to the Fed's policy rate, and the Fed's dot plot, which depicts when there will be a change in the policy rate, showed no rate change until 2023.  The Fed Chairman's statement also indicated that the Fed would continue their asset purchase program to the tune of $120 billion a month. It noted that a taper to this action would not occur until the Fed's mandate of full employment and inflation targets had been achieved.  Interestingly, on Friday, the Fed announced that it would allow changes made to the Supplementary Leverage Ratio calculation to expire at the end of the month.    The SLR calculates leverage at banks, and the policy change last year was made to help liquidity in the market.  The reversion in policy may require banks to raise capital and perhaps curb their stock repurchase programs. Financials sold off on the news.  Some expect the change could also induce banks to sell their US Treasury holdings and hinder their appetite for holding them, which could ultimately help push US yields higher. Elsewhere we saw the Bank of Japan widen its band around the 10-year JGB to 50 basis points from 40 basis points which is a form of tightening.  Russia and Turkey also surprised investors with increases in their respective policy rates.  The pandemic pushed all central banks into an accommodative mode, and interestingly the beginning of divergent central bank policy could expedite changes to asset allocations and increase volatility.  

There was quite a bit of economic data announced last week that came in worse than expected.  Initial Claims came in at 770k versus expectations of 700k.  Continuing Claims fell slightly to 4.12 million from last week's 4.142 million.  Housing starts and permits surprised to the downside.  February Retail Sales fell 3% but were expected to rise 0.2%.  Similarly, February Industrial Production fell 2.2% versus the consensus estimate of 0.7%.  March's Philadelphia Fed Index results were much better than expected, coming in at 51.8 versus expectations of 23.5 and a February reading of 23.1. 


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Darren Leavitt, CFA
Chief Investment Strategist

With over 20 years of experience in the market, Darren bring a diverse background with multiple areas of expertise. Throughout his career, Darren had held a variety of senior positions including Chief Investment Officer, Chief Financial Officer, Portfolio Manager, Senior Analyst, Senior Trader, and Financial Advisor.