• Rally Resumes. Despite a rise in late-month volatility driven largely by a move higher in US interest rates, equity markets saw a reasonably strong month in February.  The S&P 500 gained 2.8% for the period, supported by a rotation into economically sensitive stocks.  Mid- and small-cap indices saw an even larger advance as they maintained their recent positive momentum.

• Improving Fundamentals. The positive results coincided with improving fundamentals through the month.  According to data from FactSet, with the bulk of companies having reported their quarterly earnings, Q4 corporate earnings growth rate for the S&P 500 is 3.9%, which is the first quarter with earnings growth since the fourth quarter of 2019.  The ongoing Q1 corporate earnings are expected to come in at an impressive 21.8%, as we bounce back from the damage inflicted by the pandemic a year ago.  With the economy preparing to re-open, analysts are now expecting double-digit earnings growth for all four quarters of 2021.

• Public Health. Solid advances around the globe are making progress in bringing the pandemic under control.  Mass vaccination efforts are ramping higher.  In the US, we are administering over 2.1 million shots a day, and around 20% of the population has received at least one dose.  Already, we are seeing improvements in the form of declining cases of new infections and fewer hospitalized patients.  We are by no means out of the woods, but there is light at the end of the tunnel.

• Rising Treasury Yields. US Treasuries are seeing an increase in yields among longer-dated bonds, which are having an impact on bond prices.  The 10-year Treasury rose from 1.09% at the start of February to 1.53% at time of writing.  The prospects for a healthy economic recovery and rising inflation expectations are largely driving the move.  Higher rates would ultimately provide competition for investment dollars, and make it more costly for companies and individuals to borrow.  For now, rates remain low enough to not pose a significant threat to stock prices.  We continue to monitor developments in this important market.

• Supportive Policies. Fiscal and monetary policies continue to be very accommodative, in an effort to provide support toward the households and small businesses that continue to be affected by the pandemic.  Washington is moving forward with passing a second round of a large fiscal relief package.  Meanwhile, the Federal Reserve remains committed to its policy stance of low rates.

• Market Outlook. The weakness in the technology sector in recent weeks took the limelight.  However, we believe this is simply a case of valuation recalibration after their strong performance last year.  The market rally is broadening out to include other areas such as Large Value and Small Caps, which we believe is a positive development.  Against the backdrop of a re-opening U.S. economy and accommodative fiscal and monetary policies, we are cautiously optimistic on the prospects of the market for the foreseeable future.

Christopher Lai

Senior Portfolio Manager

03/11/2021