S&P 500 vs. Treasury yields
Source: Federal Reserve Bank of St. Louis, as of March 25, 2021.
- The economy remains in an “all systems go” mode this week as encouraging economic data suggests further growth ahead.1 Weekly unemployment claims in the U.S. fell to a pandemic low, while the Federal Reserve now forecasts GDP growth of 6.5% in 2021, far above any annual growth rate we’ve seen since the global financial crisis.2 Many private sector economists believe economic growth could come in higher still.
- Market sentiment certainly reflects this economic enthusiasm, as 51% of investors now expect stock prices to rise over the next six months, a 5-month high.3 Bearish sentiment, meanwhile, has trended downward since late January.3
- Against this backdrop, the S&P 500 is up a solid 3.9% YTD while the CBOE Volatility Index (VIX), which measures investor expectations of near-term volatility, recently hit a pandemic low of its own. Amid this economic and market optimism, however, the S&P’s rise has been noticeably choppier in 2021 than it was for much of the market recovery period in 2020 (from late March through December).
- While markets began climbing last March based largely on optimism for better times ahead, investors this year have had to contend with some of the challenges that accompany higher economic growth. For example, the 10-year U.S. Treasury yield has risen sharply, as have inflation expectations. The S&P also has transitioned away from some of its longer-running leaders, favoring value over growth stocks, for example, and cyclical over defensive.
- Stocks continue to have a supportive backdrop this year with the earnings outlook increasingly positive. Yet a potential path higher for investors could require significant flexibility along with an ability to quickly shift amid changing market conditions as investors adjust to the next phase of the market recovery.