Marching down the road to recovery

Mike Loewengart, Managing Director of Investment Strategy

E*TRADE Capital Management


In what has become a dominant theme for the US stock market, last month optimism about an economic rebound seemed to do battle with fears about rising interest rates and inflation.

At least in terms of the market’s performance, the former appeared to have the upper hand for much of March, aided by another massive stimulus package and reassurance from the Federal Reserve that it was still all-in on accommodation and not eyeing rate hikes until 2023. 

It doesn’t seem like the recovery–rates saga will fade into the background anytime soon, either. With President Biden unveiling a multitrillion-dollar infrastructure plan at month-end, market watchers have already begun debating whether the stimulus may potentially spur the next leg of economic growth or trigger unwelcome inflation. 

Here’s a quick recap of what happened in the markets last month and what’s on the horizon.

US equities

Stocks closed out the first quarter on solid footing, with the four major US indexes positive so far this year. The Dow and S&P 500® finished the month with respectable gains, although the small-cap Russell 2000 and tech-heavy Nasdaq Composite lagged. Recent weakness in both the stay-at-home stock rally and the reopening trade suggests that last year’s pandemic plays may have run their course—at least for now. 

March 2021 US equity performance

FactSet Research Systems

The best-performing sector was utilities—the previous month’s worst performer. Industrials and materials held their place toward the front of the sector pack, while energy and information technology brought up the rear. 

March 2021 sector performance

FactSet Research Systems

International equities

Developed markets led emerging markets, but still finished behind the broad US stock market. Emerging-market stocks fell roughly 10% from their February highs through mid-March, before rebounding. Chinese equities were hit particularly hard, but our colleagues at Morgan Stanley believe this weakness may present an opportunity, arguing that worries about China’s growth path and monetary policy may be overblown.

March 2021 international equity performance

FactSet Research Systems

Fixed income

Overall, the fixed income market was weak as investors sold bonds (driving up yields) amid fears that inflation may eat into their value. Longer-term Treasuries and investment-grade corporate bonds were among the worst-performing fixed income asset classes, a trend that has persisted for the past several months.

Municipals were a relative bright spot, posting a positive return in March. Demand for munis has been strong amid talks of potential income tax hikes (municipal bonds are typically exempt from federal taxes), and the additional fiscal jolt some state and local governments are set to receive from the latest economic relief package.

US Treasury yield curve, March 31, 2021

FactSet Research Systems

Looking ahead

Since January, investors have been subjected to occasional bouts of volatility as the market looks toward a post-pandemic future and recalibrates what a reopened economy, pent-up demand, and extraordinary monetary and fiscal policy support may mean for stock prices. For investors looking to make sense of it all, a few questions may be top of mind:

  • Do rising rates spell trouble for stocks? Although long-term interest rates have risen markedly since the start of the year, it's important to keep it in perspective. With the yield on the 10-year Treasury note hovering around 1.74%, rates are just getting back to where they were last February—levels that were, in fact, among the lowest of the past two decades. Generally, if rates are rising because the economic outlook is improving, stocks have tended to be fine.
  • Is the value trade here to stay? After roughly a decade of underperformance, value stocks, or stocks that appear underpriced based on company fundamentals, have recently stolen the show. While the recent weakness in big tech shares illustrates the headwinds a rising rate environment can create for growth stocks, many traditional value sectors, such as financials, can benefit from higher rates.
  • Will earnings measure up? With the first quarter of the year in the books, investors will be tuning into earnings season later this month to see whether corporate performance justifies record-high stock prices. Earnings for S&P 500 companies are expected to surge 23.3% in Q11—but with great expectations, the burden is now on these companies to measure up.

Thanks for reading, and we’ll talk to you again next month.

  1. FactSet Earnings Insight, 3/26/21,
Mike Loewengart
Managing Director, Investment Strategy, E*TRADE Capital Management, LLC

Mike Loewengart is the Managing Director of Investment Strategy for E*TRADE Capital Management, LLC. Mike is responsible for the asset allocation and investment vehicle selections used in E*TRADE’s advisory platforms. Prior to joining E*TRADE in 2007, Mike was the Director of Investment Management for a large multinational asset management company, where he oversaw corporate pension plan assets. Early in his career, Mike was a research analyst focusing on investment manager due diligence for the consulting divisions of several high-profile investment firms. Mike holds series 7, 24, and 66 designations, as well as the Chartered Alternative Investment Analyst (CAIA) designation. He is a graduate of Middlebury College with a degree in economics.

Andrew Cohen, CFA
Senior Director, Investment Strategy, E*TRADE Capital Management, LLC

Andrew Cohen is the Senior Director of Investment Strategy for E*TRADE Capital Management, LLC. Prior to joining E*TRADE, Andrew was the Director of Investments and Operations for a large Registered Investment Adviser, where his responsibilities included investment manager research, asset allocation, and portfolio construction. Previously, he was a Senior Research Analyst and Team Leader for a leading wealth management platform. He is a CFA® charterholder and a member of both the New York Society of Security Analysts and CFA Institute. He is a graduate of Virginia Tech with a BS in finance.

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