The S&P 500 ended February having gained 2.8% for the month. Declining COVID-19 case counts and expectations of additional economic stimulus provided positive news to offset volatility spurred by rising interest rates. February’s largest gains came in the Energy, Financials, and Materials sectors, all of which are likely to benefit as the economic growth outlook improves. Conversely, sectors that thrived during the height of the COVID-19 lockdown (Utilities, Staples, and Technology) produced flat-to-negative returns.
Enthusiasm about the economic recovery continues to benefit Small Cap stocks (Russell 2000), which gained 6.2% in February. Since the end of the 3rd quarter of 2020, Small Cap stocks have surged nearly 47%, tripling the return of the S&P 500. These gains coincided with growing investor confidence in vaccine production and distribution. International stocks (MSCI EAFE) gained 2.1% in February, as vaccine distribution has gained momentum globally. Conversely, Fixed Income (Barcap Intermediate Govt./Credit Index) had its worst month in over a year, falling 1.2% on rising interest rates.
Over the next few months, investors will navigate the positive and negative narratives that accompany what is expected to be a historic economic recovery. The decline in COVID-19 case counts, increased vaccination rates, and an abundance of economic stimulus should boost consumer spending, consumer confidence, and stock market earnings estimates. However, these stock stimulants are also likely to cause interest rates to rise, potentially to a point of legitimate competition with equities. Additionally, investors will be sensitive to any developments that may inhibit or hinder the economic recovery.
These changing narratives will likely create investment opportunities, particularly in areas of the economy that should benefit from economic reopening. Over the last few months, our investment strategy has increasingly focused on these kinds of stocks. We will continue to capitalize on market volatility as opportunities present themselves.
With tax season upon us, please do not hesitate to reach out with questions regarding your Baird documents. Thank you and as always, we welcome your questions or comments.
Past Performance is no guarantee of future results. All investments carry some level of risk. The S&P 500 Index is an unmanaged, market capitalization weighted index of 500 common stocks widely regarded to be representative of the US market in general. Russell 2000® Index (U.S. Small Caps): Measures the performance of the 2,000 smallest companies in the Russell 3000®Index, which represent approximately 10% of the total market capitalization of the Russell 3000® Index. Russell Midcap® Index: Measures the performance of the 800 smallest companies of the Russell 1000® Index, which represents approximately 36% of the total capitalization of the Russell 1000® Index which is a mid‐cap index. MSCI EAFE Index: Measures the equity market performance of developed markets outside of the U.S. & Canada. MSCI EM Index: Captures large and mid cap representation across 24 Emerging Markets countries and covers approximately 85% of the free float-adjusted market capitalization in each country. Barclays Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Indices are unmanaged and direct investment is not possible. The Barclays Intermediate Government/Credit Bond Index tracks the performance of intermediate term U.S. government and corporate bonds. Indices are unmanaged and direct investment is not possible. The opinions expressed are those of the author and not necessarily those of Robert W. Baird & Co. Incorporated. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNERTM and CFP® in the U.S.