February 2021 Monthly Market Review
Risk assets performed well in February but waned as the month came to a close. Optimism about an improving economy continued to grow as Democrats worked to push through a $1.9 trillion stimulus package and the COVID-19 vaccine efforts built momentum as a third vaccine option was added. Inflation expectations—as measured by the difference between the nominal Treasury yield and the TIPS real yield—widened as the reflation trade gathered steam.
Rising inflation expectations led to strong gains across commodities, particularly rising energy prices and rallies in industrial metals like copper. Equities markets also reflected this optimism with a rebound in value stocks versus growth and outsized gains in mid to small cap companies compared to larger companies. As expected, bonds declined as yields rose to compensate for higher inflation. Rising yields, on the other hand, led to a rally in the U.S. dollar.
Real asset categories generally outperformed broad equity markets. Commodities rallied 6.5%, led by a 17.0% gain in crude oil, which finished the month at $64 per barrel—the fourth straight month of increases. February’s sharp move higher was supported by resilient demand from an improving macro backdrop and supply disruptions. An unprecedented winter storm in Texas curbed U.S. crude production by millions of barrels per day while existing production cuts by OPEC+ nations continued to leave markets undersupplied. Rising commodity prices and improving fundamentals fueled the 22.7% rise in energy equities, which sharply outperformed broad equity markets.
Industrial metal prices also rallied sharply (+10.1%), led by copper (+14.9%), which recorded its largest monthly gain in more than four years. The metal advanced on a combination of supply shortages, strong Chinese demand, and expectations that a strong global economic recovery in 2021 could significantly boost demand. Copper is a key component in a wide variety of goods, including appliances, electronics plumbing, automobiles, and key infrastructure. Demand for copper has grown due to concerns about inflation and the world’s transition to green infrastructure and energy systems that utilize significant amounts of copper (wind turbines, solar panels, electric vehicles, etc.).
While global equities posted solid returns overall, they were wide-ranging with respect to investment styles, sectors, regions, and market caps. Building on relative strength during late 2020, the Russell 3000 Value Index (+6.3%) outpaced the Russell 3000 and Russell 3000 Growth Indexes by more than 300 bps and 600 bps, respectively—the best month of relative outperformance since the burst of the dot-com bubble in February 2001.
Financials, the largest sector weight in the value index, posted double-digit gains in February, while energy was up more than 20% as U.S. oil prices increased. At the other end of the spectrum, technology—one of the top-performing sectors during the first half of the month—struggled as February came to a close as many of the stocks with the highest growth profiles declined sharply.
Health care fell during the month while more defensive consumer staples and utilities sectors also struggled, making for a challenging month for lower beta and low volatility strategies. Small caps continued to surge, with the Russell 2000 up 6.2% for the month and 11.6% YTD. This compared favorably to large cap stocks as the S&P 500 was up just 2.7% in February and 1.7% YTD. Across the FAANGM stocks and Tesla, only Microsoft (+4.7%) and Alphabet (+15.4%) have posted gains YTD.
Equity returns abroad followed a similar pattern. Developed non-U.S. equities rose 2.2%, with value (+4.8%) besting growth (-0.3%). As was the case in the U.S., financials (+8.7%) and energy (+9.9%) were the top performing sectors and helped drive value’s outperformance. Traditionally more defensive sectors like utilities, health care, and consumer staples posted declines in excess of 4% for the month.
Emerging markets (EM) continued to rally into February, but cooled late in the month as rising rates in the U.S. dampened EM sentiment. After hitting peak gains of just over 90% from pandemic lows through February 17th, EM equities fell 6.3% in the final week of the month as rising global borrowing costs pressured the asset class. The MSCI EM Index closed the month up just 0.8%. EM growth stocks (−1.1%) were hit particularly hard, while their value counterparts gained 2.8%. China (−1.0%) was among the worst performing countries as some of its large, Hong Kong-listed companies sold off. Examples included internet and ecommerce giants Alibaba (−6.3%), Tencent (−2.8%), and Meituan Dianping (−5.0%). Brazil (−6.3%) was also a notable laggard as investors feared that President Jair Bolsonaro’s decision to replace the chief executive of state-owned oil company Petrobras signaled a change in his commitment to market-friendly reforms. Shares of Petrobras (−20.6%) fell sharply on the news and stoked a decline across both the equity market and currency, which fell 2.0%.
The 10-year Treasury note yielded 1.08% at the beginning of February, but steadily rose during the month as a higher inflation premium began to be reflected in the market. These increases began to grow larger in the final few days of the month. On February 25th, the 10-year yield spiked from 1.46% at the open to an intraday high of 1.61% before closing the day at 1.52%. On the last day of the month, the 10-year fell another 6 bps, ending the month at 1.46%. Market participants grew concerned that the new fiscal program working its way through Congress would force the Fed to remove accommodation earlier than expected.
The rate increases were negative for returns, causing long-dated Treasuries to fall 5.6% in February and intermediate-term Treasuries to decline 2.0%. Credit spreads absorbed much of the rise in Treasuries, but investment-grade corporates registered a 1.7% decline. The only spread sectors that were positive were high yield and floating rate loans, which rose 0.4% and 0.3%, respectively.
Currency markets reflected widening interest rate differentials between the U.S. and much of the rest of the world. Outside of a handful of currencies—the British pound (+1.8%), the Canadian dollar (+0.9%), Australian dollar (+0.9%), and the Ukraine hryvnia (+0.5%)—the U.S. dollar rallied against the vast majority of both developed market and EM currencies.