If you missed out on some important stock market stories this month, we have you covered here. March was yet another month where we enjoyed market growth and economic recovery. There were also some key developments and valuable lessons that should be significant to long-term investors. Here is some of what you may have missed last month.
1. COVID-19 is no longer the biggest threat to the stock market
A major turning point was reached in March. According to respondents to Bank of America‘s fund manager survey, the coronavirus pandemic was no longer the largest investment risk. Asset managers are now more concerned about inflation and the bond market. That’s the first time in a year that the coronavirus has not been considered the biggest threat to the stock market.
This shift in focus is being fueled by the ongoing vaccine rollout and encouraging economic recovery news. Unemployment figures for February were lower than anticipated. Notably, 350,000 jobs were added in hospitality, the bulk of which were in restaurants. Hotels, amusements, gambling, and other recreation also trended positively.
Consumer sentiment also charged forward, as the University of Michigan’s well-known index rose from 76.8 in late February to 83.0 in mid-March. Fiscal stimulus is playing a large role in this, but easing restrictions and better employment are also factors. These key indicators, along with a stellar corporate earnings season, are shifting the focus among fund managers elsewhere.
This is creating a rare and counterintuitive situation for investors. If conditions improve too much, too quickly, it has the potential to drive inflation higher, which could in turn force the Fed to raise interest rates earlier than they’ve forecast. With inflation and bond markets identified as the most salient risks, stocks could move downward if investors fear that too much good news will influence monetary policy. The market could also falter if public health stats trend negatively due to vaccine-resistant strains and increased social interaction.
For most investors, this level of uncertainty and complication makes any sort of short-term strategy too difficult. A long-term approach based on fundamentals allows you to ignore the temporary “bad news is good news” situation.
2. The Fed is keeping rates low
With all the news of recovery and inflation swirling, the Fed has held strong to its timeline of keeping interest rates low until 2024 at the earliest. Of note, Chairman Jerome Powell acknowledged that inflation could tick up if the economy recovers swiftly, but the central bank clearly believes that elevated unemployment is a bigger threat to economic stability than inflation would be.
Low rates and inflation are both good for the stock market, so accommodative monetary policy should support the current valuations as corporate financials round back into form. Keep the above story in mind, though — bond investors over the past two months have signaled that they expect higher rates, and any indication that the Fed will break from its timeline could cause a “taper tantrum.”
3. The growth versus value yo-yo
All the turmoil of the past year, combined with the current macroeconomic uncertainty, has created conditions where different types of stocks are behaving in different ways. Last year, a number of growth stocks led the market to all-time highs, especially as capital piled into tech names that were leading the way through the pandemic.
Investors are more worried about short-term volatility, but they are also confident in medium-term economic stability. This is drawing capital away from growth stocks and creating demand for value stocks, which outperformed the market last month.
However, not everyone is on the same page. The promise of unrelenting monetary stimulus and the continued eruption of disruptive tech are still pulling some investors into growth names. In some days early last month, value and growth stocks moved inversely, creating a “yo-yo” effect as the market sought equilibrium.
This dynamic underlines the merit of portfolio diversification. Every asset class has its day, and a stock portfolio that holds different types of stocks should be buoyed by relatively strong performance across some of its allocation regardless of conditions.
4. Hedge fund fallout
The Archegos Capital Management saga drew a lot of media attention over the past week, as the family-run hedge fund’s high leverage and large, unreported positions in several stocks triggered massive sell-offs following a margin call. This event didn’t directly affect the vast majority of investors, but it was a rather extreme event that carries a valuable lesson for anyone. Stocks like ViacomCBS didn’t report any stock-related news, but the stock suffered major price losses because Archegos needed to sell shares of the company to help it meet a margin call.
Short-term stock price movements are generally dictated by supply and demand at any given time, and those movements might have nothing to do with business fundamentals. For retail investors, long-term strategies that account for this are the only way to avoid this sort of no-news debacle. Even then, investors need to recognize the limitations of their own knowledge and build a diversified portfolio with that in mind.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.