Choppy but Higher

Markets stuck with their two-steps-forward one-step-backwards trading pattern in March as investors continued wrestling with several competing, quickly shifting factors. The dollar bounced off of its lows as US Treasury yields continued their march higher.

On the bull side, strong earnings expectations, an accelerated vaccine distribution timeline, and the broad issuance of direct stimulus-fueled investor enthusiasm. On the bear side, the enthusiasm is perhaps overdone, while potentially higher tax rates and elevated valuations remain major concerns.

Our Perspective

As the world slowly starts to return to a semi-normal state, expectations will be key. Markets are forward looking, and when they price in good news before it actually happens (i.e., valuations rise), then it can create a ‘sell on the news’ type of result.

This axiom is especially true at a time when policy changes are driving more short-term market movements than we have seen in quite some time. The potential for a massive infrastructure bill and/or changes to the Federal Reserve’s ultra-easy monetary policy regime are some of the next major catalysts looming on the horizon.

Additionally, all these forces are further jostled by a seemingly relentless rise in interest rates. As US rates keep grinding higher, they may further disrupt equity markets as investors recalibrate their asset allocations for a world with higher yields. We believe equity market valuations may compress should rates continue moving higher.

Stimulus and Style Trends

Just a few weeks ago, President Biden signed the American Rescue Plan Act into law, bringing direct aid to millions of Americans. More broad-based stimulus means both more spending and more savings (i.e., pent up demand), and GDP expectations reflect this shift.

Our Perspective

While rising growth expectations theoretically benefit the market as a whole, in reality, what we're seeing is more of a rotation under the surface. Growth stocks and other expensive equities again took a backseat to cyclical and more value-style stocks throughout the month, continuing the year-to-date trend. How much farther this reversal has to run is the key question.

For us, it isn’t about picking the exact moment when we think this stops and growth comes back into favor. We still see opportunity in both growth and value.

For more, check out our recent blog post, Stimulus, Small Caps, and Growth.

Surprise Stocks

The best investments are often the most overlooked, and we recently found compelling opportunities in three industries with unique stories.

Our Perspective

In salvage auctioneering, the boom in higher-tech cars has made them harder and more expensive to repair. As a result, and when in an accident, more cars are now being marked as ‘totaled’ even if they are still repairable, could be sold for parts, or otherwise have residual value.

Consumer credit analytics is a monopoly-like industry. As the ubiquity of credit scores has grown, they’ve become a kind of common language for financial services, deepening their hooks throughout the system and creating strong pricing power.

Packaging may seem like a boring business, but sustainable packaging is a fast-growing trend. And unlike plastic-based materials, green packaging is not easy to make. As manufacturers branch further into more complex packaging needs, we see plenty of growth potential in the future.

As always, the areas of opportunities our research processes actively uncover are also considered alongside the rest of your total portfolio in order to best manage risk and reward.

For more, check out our recent blog post, Three Industries that Shouldn’t Be Ignored.

Our View
Economic Cycle		Although the recovery was slowed by a resurgence in cases, additional fiscal stimulus is reaccelerating the pace of the recovery, boosting economic activity and business/consumer confidence
Stock Market		The US stock market is well past pre-pandemic levels and in the vicinity of all-time highs; valuations are broadly elevated, which, alongside rising interest rates and inflation, pose significant risks
Bond Market		While still depressed by historical standards, interest rates are now far off their lows; corporate and municipal bond credit spreads have significantly tightened, and in some cases, are depressed beyond pre-pandemic levels
Foreign Exchange		While we believe the dollar may weaken longer-term, in the short-term, it is difficult to make the argument that currencies will swing significantly
Important Issues on the Radar		COVID-19: the worst of the crisis is behind us, and the US appears to be finally on track for a once and for all economic re-opening, driven by vaccine efficacy and distribution
		Trade Tensions: relations are in structural decline as China focuses on becoming a self-sufficient, global hegemon, potentially impacting global trade and supply chains
		China Credit Cycle: China is further along in its economic recovery and its credit cycle appears to have peaked, potentially creating a capital markets headwind ahead
		Inflation vs. Deflation: the significant demand shock and remaining economic slack are disinflationary broadly, but certain bottlenecks may lead to some transitory inflation issues near-term

Indicates change

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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