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Dear clients and friends,

At Perseus Wealth it is important to us that you are well informed about what is happening in the markets.  Here are a few of the key topics of conversation that deserve the most attention this month. If you have any questions or would like additional detail, we would love to participate in further discussions.

What’s Happening?  Over the past few weeks, the most consequential news came as President Biden signed the latest relief package into law on March 11th, with the first round of checks hitting American bank accounts a few days after that.  As demonstrated by the last stimulus package, economic data is expected to improve in the short-run, at the potential cost of increased short-term inflation.  Unless monetary supply continues to grow at the exorbitant rates of the last twelve months, however, continuing higher inflation is not expected to be an ongoing issue until/unless the labor market strengthens further and/or we see the Fed pursuing a tighter monetary policy.

President Biden has also announced he will push to have all adults eligible for the COVID vaccine by May 1st. While this revised the timeline is well ahead of prior official announcements, it was presaged by the Johnson & Johnson February vaccine approval and subsequent vaccine purchase announcements.  This increases the probability of getting to a “full” economic reopening in the third quarter.

February’s employment report blew past expectations, with the economy adding 379K new jobs (1) compared to an economists’ survey by Bloomberg expecting only 200K, while January’s figure was also revised upward. Driving February’s gains was a rebound in leisure and hospitality hiring (2). The overall unemployment rate ticked down to 6.2%, while the labor participation rate was flat (3).

Against the backdrop of improving hiring and faster vaccinations, interest rates increased dramatically across the longer end of the yield curve (4). U.S. 10-year Treasury yields increased above 1.5% for the first time since the start of the COVID crisis.  As yields rose, technology sector valuations – already at historically high levels – were hit hardest as investors fled riskier assets.  Longer term, however, volatility in the technology sector is not expected to be sustained.

Despite the interest rate movements, inflation has currently remained at relatively muted levels, with February’s headline CPI rising 0.4% vs. January and 1.7% vs. last year (5). The monthly rise was mostly driven by an increase in energy prices, notably natural gas amid the weather seen across the country last month. While the overall increase matched median Bloomberg consensus forecasts, a core figure rising only 0.1% was slightly weaker than expected, attributed largely to slack in the labor market. It’s important to note that year-over-year inflation numbers should start to become relatively “huge” for the next six plus months given the base number from last year was in the teeth of the pandemic.

The ISM Manufacturing Index continued to rise in February to 60.8, up from 58.7 in January and staying solidly in expansionary territory (readings above 50 indicate an expansion) (6). Services, measured by the ISM Services Index, unexpectedly fell, probably on the back of weather disruptions in the U.S., (most notably in Texas) last month (6).  Manufacturing’s recovery is likely to happen in “fits and starts” as stimulus comes and goes, while inventory levels (i.e., products on store shelves) should hopefully be back to normal by mid-third quarter.

What It Means: The economy is in a really good spot when viewed from where the country was a year ago.  There may be problems ahead: a stimulus hangover (inflation concerns), the possibility of a continuing rising interest rate environment and/or tighter monetary policy.  In the meantime, markets will likely continue to melt upward with significant periods of volatility. 


Best Always,


John and Sean

 

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that any strategy will be successful.