Stocks Commentary
Previous

The Calendar, And Data, Could Be Kind

April 2021

Historically speaking, April has been a profitable month for equity investors, the S&P 500 posting an average monthly return of 0.9% since 1928, trailing just December on that metric. The calendar could again prove kind for investors in stocks amid building economic optimism, an improving labor market, and ‘easy’ year over year comparisons once earnings season kicks off mid-month. As economic data improves, animal spirits and a persistent sea of liquidity should remain supportive of additional equity upside throughout the balance of this year; however, the past few months have been characterized by rotations between sectors, styles, and factors, coinciding with periods of heightened volatility as long-term interest rates have trended higher. More of the same should be expected over coming quarters.

Large cap stocks have weathered the storm that is rising long-term Treasury yields well; the S&P 500 ended March within points of an all-time closing high and began April on a winning streak. First quarter (1Q21) earnings season could serve as a positive catalyst when it begins in mid-April, with ‘easy’ year over year comparisons in place. However, investors may balk at bidding up share prices of companies that simply clear a low bar and could become more selective, rewarding companies confident enough to issue or reinstate earnings guidance. It’s notable that 1Q21 S&P 500 earnings are projected to rise 20% over 1Q20 and the onset of the COVID-19 pandemic, while growth estimates for 2Q21 are even loftier, with the consensus expecting 51% earnings growth over 2Q20. While great expectations can, if they are not met, bring greater potential downside to stocks, we don’t foresee year over year comparisons for domestic large cap stocks becoming a potential hurdle until the back half of ‘21 as companies stepped up cost-cutting efforts in the third quarter of 2020.

Expectations for increased government spending and rising inflation pushed long-term Treasury yields higher during 1Q21 and drove demand for dollars from abroad, with the U.S. Dollar Index, or DXY, ending 3.5% higher. Dollar appreciation, along with expectations that the U.S. economic recovery would outpace the global recovery led to continued outperformance out of domestically oriented small and mid-cap (SMid) companies relative to the S&P 500 during the quarter, although both the S&P 500 and Russell 2500 ended the first quarter higher, by 6.1% and 10.5%, respectively. After a pullback that began in mid-March, small cap stocks were no longer in overbought territory based on short-term relative strength indicators (RSI) as April began. The prospect of higher funding costs stemming from rising long-term Treasury yields led to profit-taking, the Russell 2000 ending March 6% below its March 15 all-time intra-day high. The months ahead may bring opportunities to increase exposure to SMid but, in our view, investors must be more discerning, buying ‘quality’ companies with little debt, as a need to roll maturing debt amid higher yields could decrease profitability and limit free cash flow generation.

Economic growth in the Eurozone remains clouded by lockdowns and a spotty vaccine rollout, but European equities have held up surprisingly well despite the persistent uncertainty. The Euro Stoxx 50 index ETF (FEZ) rose 4.7% in March alone and is up 6.7% year-to-date. European equities, and international developed markets more broadly, remain attractively valued relative to U.S. equities, and could be poised to perform well as vaccines become more widely available. Expectations remain low for economic growth in Europe and Japan, which has been the case for much of the past decade, and investors who perennially underweight foreign developed markets relative to U.S. equities could find reasons to allocate capital there as the global growth picture comes clearer into view.

We remain overweight domestic large cap stocks (S&P 500), sourcing proceeds from developed markets abroad. Over the coming months, as the global growth picture improves, moving back toward ‘neutral’ on international equities may make sense, but we expect U.S. equities to garner inflows as earnings season ramps up and improving economic data boosts confidence surrounding the U.S. recovery. We maintain a neutral allocation to domestic small and mid-cap stocks and emerging market equities. The post-election rally in smaller capitalization stocks reached an apex in mid-March, and some ‘froth’ has been worked off over recent weeks. We believe selectivity and a focus on ‘quality’ across SMid will be important moving forward, leading us to favor active management over ‘beta,’ or index-linked exposures. Emerging markets were weak throughout March amid a sell-off in Chinese equities. A weakening U.S. dollar as economic growth prospects improve abroad over coming months could be a tailwind for developing markets, but rising Treasury yields could be an offset as technology valuations may come under pressure, leading to weakness in China, South Korea, Taiwan, and other countries tethered to tech.

Source: Bloomberg, Factset

Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

Next

On a scale from 1 to 5, with 1 being 'Not Good' and 5 being 'Excellent', how would you rate this article?

Press enter to submit your rating

Rate this Article

Use this form to provide additional feedback based on the rating you provided.

Thanks for Rating

Would you like to provide feedback?

Thanks for your feedback!

The content and any portion of this newsletter is for personal use only and may not be reprinted, sold or redistributed without the written consent of Regions Bank. Regions, the Regions logo and other Regions marks are trademarks of Regions Bank. The names and marks of other companies or their services or products may be the trademarks of their owners and are used only to identify such companies or their services or products and not to indicate endorsement or sponsorship of Regions or its services or products. The information and material contained herein is provided solely for general information purposes. Regions does not make any warranty or representation relating to the accuracy, completeness, or timeliness of any information contained in the newsletter and shall not be liable for any damages of any kind relating to such information nor as to the legal, regulatory, financial or tax implications of the matters referred herein. This material is not intended to be investment advice nor is this information intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only current as of the stated date of their issue. Regions Wealth Management is a business group within Regions Bank that provides investment, administrative and trustee services to customers of Regions Bank.

Neither Regions Bank nor Regions Institutional Services (collectively, “Regions”) are registered municipal advisors nor provide advice to municipal entities or obligated persons with respect to municipal financial products or the issuance of municipal securities (including regarding the structure, timing, terms and similar matters concerning municipal financial products or municipal securities issuances) or engage in the solicitation of municipal entities or obligated persons for such services. With respect to this presentation and any other information, materials or communications provided by Regions, (a) Regions is not recommending an action to any municipal entity or obligated person, (b) Regions is not acting as an advisor to any municipal entity or obligated person and does not owe a fiduciary duty pursuant to Section 15B of the Securities Exchange Act of 1934 to any municipal entity or obligated person with respect to such presentation, information, materials or communications, (c) Regions is acting for its own interests, and (d) you should discuss this presentation and any such other information, materials or communications with any and all internal and external advisors and experts that you deem appropriate before acting on this presentation or any such other information, materials or communications.

Employees of Regions Asset Management may have positions in securities or their derivatives that may be mentioned in this report or in their personal accounts. Additionally, affiliated companies may hold positions in the mentioned companies in their portfolios or strategies. The companies mentioned specifically are sample companies, noted for illustrative purposes only. The mention of the companies should not be construed as a recommendation to buy, hold or sell positions in your investment portfolio.

This communication is provided for educational and general marketing purposes only and should not be construed as a recommendation or suggestion as to the advisability of acquiring, holding or disposing of a particular investment, nor should it be construed as a suggestion or indication that the particular investment or investment course of action described herein is appropriate for any specific retirement investor. In providing this communication, Regions is not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity.