Weekly Market Recap 3.19.21

Overview: Stocks across the globe were generally lower last week, but remain firmly in positive return territory for the year. All three major indices that Avantax Planning Partners’ monitors weekly, i.e. the S&P 500 Index, international developed (MSCI EAFE) and emerging markets (MSCI EM) are up around 4-4.5% for the year-to-date. Volatility has continued in the markets, as investors factor in rising inflation expectations and the ensuing effect on bond yields. The highlight of the past week was the Federal Reserve meeting, where the Fed reiterated its commitment to low policy rates while revising their U.S. gross domestic product (GDP) growth forecast upward to 6.5% (from 4.2%) on the back of strong U.S. economic recovery expectations. The Fed also stated they believe that any inflation above their target of 2% will be temporary, and that growth will accelerate this year but then moderate (see additional comments below). Interest rates have continued to rise given the strong economic expectations, with the 10-year Treasury ending the week at a yield of 1.73%, up about 0.25% since the beginning of the month. 


A note on the Federal Reserve (From JP Morgan): At last week’s Federal Open Market Committee (FOMC) meeting, the Fed reinforced its accommodative policy stance through a fresh set of interest rate and economic projections. The committee maintained the federal funds rate target range of 0-0.25% and the current pace of asset purchases at $120 billion per month. Notably, the Fed materially upgraded its real GDP projection from 4.2% to 6.5% year over year in 4Q21. However, only a slight improvement was applied to 2022, while 2023 growth was downgraded. These estimates reflect the Fed’s view that growth will accelerate this year and moderate thereafter. Additionally, core and headline PCE inflation were revised higher to 2.2% and 2.4% year over year in 2021. Both are expected to cool to 2.0% next year, indicating that the Fed will tolerate higher realized inflation in the short term, but views it as transient. The outlook for strong growth and higher inflation has led investors to pull forward rate hikes, with futures markets now predicting at least one hike in 1Q23. Interestingly, even after the new median Fed dot plot signaled zero rates through the forecast period, the markets are pricing in an even more hawkish policy response in 2023. Furthermore, since the Fed meeting, the 10-year Treasury yield has surged over 1.7% as of Friday. While the Fed officially continues to project no short term-rate hikes before 2024, markets are increasingly pricing in higher growth and inflation – a sign that investors should positions themselves for a steepening yield curve.

Market Returns and Data: 

Sources: JP Morgan Asset Management, Goldman Sachs Asset Management.

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