Quarterly Market Review: January-March 2021

Quarterly Market Review: Q1 2021

The Markets (first quarter through March 31, 2021)

As we closed out 2020, the overwhelming sentiment entering January was that it couldn't get much worse.
Unfortunately, January did not start out on a high note. During the first week of the month, protesters
stormed the United States Capitol, leading to violence, the disruption of the presidential election
certification, and several deaths. Nevertheless, the inauguration of Joe Biden as our 46th president took
place as scheduled. January also saw the emergence of virus mutations, the uneven distribution of
COVID-19 vaccines, and the gradual relaxation of pandemic-related restrictions. Also during January, a
new phenomenon in stock price manipulation emerged involving several companies, including a
video-game company. Ultimately, stocks closed the month mixed, with the Russell 2000 and the Nasdaq
gaining, while the Dow and the S&P 500 fell. Treasury yields, the dollar, and crude oil prices advanced.


Major equity indexes reached record highs in February, only to pull back by the end of the month. Fearful
that inflationary pressures would mount, investors favored value stocks over growth, pushing small-cap and
mid-cap stocks higher. Investors were encouraged by President Joe Biden's $1.9 trillion stimulus proposal,
accelerated vaccine distribution, and better-than-expected fourth-quarter corporate earnings. By the end of
February, each of the benchmark indexes listed here posted gains led by the Russell 2000, which
advanced more than 6.0%. The yield on 10-year Treasuries continued to grow, crude oil prices pushed past
$61 per barrel, and the dollar rose. Only 50,000 new jobs were added in February, although unemployment
claims decreased.


Stocks continued to push higher in March. Several of the benchmark indexes posted noteworthy gains
including the Dow (6.6%), the S&P 500 (4.2%), and the Global Dow (4.0%). The Russell 2000 (0.9%) and
the Nasdaq (0.4%) advanced moderately. Among the sectors, industrials (8.1%), utilities (7.4%), consumer
staples (6.5%), and materials (6.4%) led the way. Treasury yields and the dollar advanced, while crude oil
prices and gold fell.


Overall, the first quarter was definitely eventful. Additional federal stimulus payments lined many
pocketbooks; a group of amateur traders banded together through social media to drive shares of a video
gaming company to astronomical heights; interest rates jumped, stoking fears that inflationary pressures
were rapidly building; and equities ultimately enjoyed robust returns. The small caps of the Russell 2000
gained nearly 12.5%, the Global Dow climbed 9.4% and the large caps of the Dow (7.8%) and the S&P 500
(5.8%) posted solid gains. Tech shares, which had driven the market for much of 2020, slumped during the
quarter, but still gained enough ground to push the Nasdaq up by almost 3.0%. Energy shares posted
some of the biggest gains in the quarter, with that market sector surging over 30.6%. Financials jumped
18.0%, followed by industrials (12.0%), materials (10.8%), and real estate (10.0%). Only information
technology failed to advance by the end of the quarter. The yield on 10-year Treasuries climbed more than
80 basis points. Crude oil prices increased and the dollar rose. Gold prices fell nearly 10.0% in the first
quarter. Year to date, the Russell 2000 is well ahead of its 2020 year-end closing value, followed by the
Global Dow, the Dow, the S&P 500, and the Nasdaq.


The price of crude oil (CL=F) closed at $59.32 per barrel on March 31, lower than the February 26 price of
$61.50 per barrel but well above the December 31 price of $48.52. The national average price of retail
regular gasoline was $2.852 per gallon on March 29, up from the February 22 price of $2.633 and 27.0%
higher than the December 28 selling price of $2.243. The price of gold finished March at $1,708.40 per
ounce, lower than the February 26 price of $1,728.10 per ounce and significantly below its December 31
closing value of $1,893.10 per ounce.


Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Month's Economic Headlines

  • Employment: There were 379,000 new jobs added in February after only 49,999 new jobs were added
    in January. In February, the unemployment rate fell by 0.1 percentage point to 6.2%, and the number of
    unemployed persons decreased by 150,000 to 10.0 million. Although both measures are much lower
    than their April 2020 highs, they remain well above their pre-pandemic levels in February 2020 (3.5%
    and 5.7 million, respectively). Among the unemployed, the number of persons on temporary layoff
    decreased in February by 517,000 to 2.2 million. This measure is down considerably from the recent
    high of 18.0 million in April but is 1.5 million higher than its February 2020 level. In February, the number
    of persons not in the labor force who currently want a job, at 6.9 million, was little changed over the
    month but is 1.9 million higher than in February 2020. The number of employed persons who teleworked
    in February because of the coronavirus pandemic edged down to 22.7%, 0.5 percentage point lower
    than January. In February, 13.3 million persons reported that they had been unable to work because
    their employer closed or lost business due to the pandemic. This measure is 1.5 million lower than in
    January. February saw notable job growth in leisure and hospitality (355,000), although employment in
    that area is down by 3.5 million over the year. Job growth also occurred in food services and drinking
    places (286,000); trade, transportation; and utilities (49,000); health care and social assistance (45,600);
    and professional and business services (63,000). The labor force participation rate was unchanged at
    61.4%, and the employment-population ratio inched up 0.1 percentage point to 57.6%. Average hourly
    earnings increased by $0.07 to $30.01 in February and are up 5.3% from a year ago. The average work
    week declined by 0.3 hour to 34.6 hours in February.


  •  Claims for unemployment insurance continued to drop. According to the latest weekly totals, as of March
    13, there were 3,870,000 workers receiving unemployment insurance benefits, down from the February
    20 total of 4,419,000. The insured unemployment rate fell 0.4 percentage point to 2.7%. During the week
    ended March 6, Extended Benefits were available in 16 states (18 states during the week of February
    6); 51 states and territories reported 7,735,491 continued weekly claims for Pandemic Unemployment
    Assistance benefits (7,518,951 in February), and 51 states and territories reported 5,551,215 continued
    claims for Pandemic Emergency Unemployment Compensation benefits (5,065,890 in February).


  •  FOMC/interest rates: The Federal Open Market Committee met in March. According to the Committee
    statement, employment has turned up recently and, despite investor concerns, inflation continues to run
    well below 2.0%. The Committee continues to hold interest rates at their current 0.00%-0.25% target
    range and expects no change through 2023.


  •  GDP/budget: The gross domestic product advanced at an annual rate of 4.3% in the fourth quarter of
    2020. The GDP increased 33.4% in the third quarter after contracting 31.4% in the second quarter.
    Consumer spending, as measured by personal consumption expenditures, increased 2.2% in the fourth
    quarter after surging 41.0% in the third quarter. Nonresidential (business) fixed investment climbed
    13.1% following a 22.9% increase in the third quarter; residential fixed investment continued to advance,
    increasing 36.6% in the fourth quarter after soaring 63.0% in the prior quarter. Exports advanced 22.3%
    in the fourth quarter (59.6% in the third quarter), and imports (which are a negative in the calculation of
    GDP) increased 29.8% in the fourth quarter (93.1% in the third quarter). Federal nondefense
    government expenditures decreased 8.9% in the fourth quarter following a third-quarter decline of 18.3%
    as federal stimulus payments and aid lessened. The GDP fell 3.5% in 2020 after increasing 2.2% in
    2019. Personal consumption expenditures dropped 2.63%; nonresidential fixed investment declined
    0.54%; residential fixed investment rose 0.23%; exports dropped 1.47%; imports rose 1.33%; and
    nondefense government spending advanced 0.15%.


  •  The federal budget deficit was a larger-than-expected $310.9 billion in February, following January's
    $162.8 billion deficit. The deficit is 32.0% higher than the February 2020 deficit of $235.3 billion. The
    deficit for the first five months of fiscal year 2021, at $1.047 trillion, is 68% higher than the first five
    months of the previous fiscal year. Through February, government outlays, at $559.2 billion, were 32.0%
    above the February 2020 figure, while receipts, at $248.3 billion, also increased 32.0%. The increase in
    government expenditures can be traced to a 125.0% jump in outlays for income security, an 859.0%
    increase in commerce and housing credits, and a 26.0% rise in health outlays.


  •  Inflation/consumer spending: Inflationary pressures eased in February. According to the latest
    Personal Income and Outlays report, consumer prices edged up 0.2% in February after advancing 0.3%
    in January. Prices have increased 1.6% from February 2020. Excluding food and energy, consumer
    prices increased 1.4% over the last 12 months. Both figures are well below the Fed's 2.0% target
    inflation rate. Personal income fell 7.1% in February after climbing 10.0% in January, and disposable
    personal income dropped 0.8% following January's 11.4% jump. The decrease in personal income in
    February is more a reflection of stimulus payments received in January, which accounted for that
    month's soaring income estimates. Consumer spending declined 1.0% in February after advancing 3.4%
    (revised) in January. Over the last 12 months, personal consumption expenditures (consumer spending)
    dipped 2.7%.


  •  The Consumer Price Index climbed 0.4% in February following a 0.3% rise in January. Over the 12
    months ended in January, the CPI rose 1.7%. Gasoline prices continued to increase, rising 6.4% in
    February and accounting for over half of the CPI increase. Consumer prices less food and energy rose
    0.1% in February. The CPI less food and energy prices is up 1.3% over the past 12 months. Food prices
    rose 0.2% in February after edging up just 0.1% in January. In February, prices for apparel fell 0.7%
    after climbing 2.2% the prior month. Prices for new vehicles were unchanged in February, while prices
    for used cars and trucks dropped 0.9% for the second consecutive month.


  •  Prices that producers receive for goods and services continued to climb in February, increasing 0.5%
    after advancing 1.3% in January. Producer prices increased 2.8% for the 12 months ended in February,
    which is the largest yearly gain since climbing 3.1% for the 12 months ended in October 2020. Producer
    prices less foods, energy, and trade services rose for the tenth consecutive month after advancing 0.2%
    in February. Food prices increased 1.3% in February after increasing 0.2% in January, while energy
    prices followed a 5.1% January increase by jumping 6.0% in February.


  •  Housing: The housing sector retreated in February, likely due to dwindling inventory. Nevertheless,
    sales of existing homes fell 6.6% in February after rising 0.6% in January. Over the past 12 months,
    existing home sales increased 9.1%. The median existing-home price was $313,000 in February
    ($309,900 in January), up 15.8% from February 2020. Unsold inventory of existing homes fell 29.5%
    from February 2020 and represents a 2.0-month supply at the current sales pace, slightly better than
    January's 1.9-month supply. Sales of existing single-family homes also dropped 6.6% in February after
    advancing 0.2% in January. Year over year, sales of existing single-family homes rose 18.6%. The
    median existing single-family home price was $317,100 in February, up from $308,300 in January.


  •  New single-family home sales plunged in February. New home sales dropped 18.2% after climbing 4.3%
    in January. Sales of new single-family homes have increased 8.2% since February 2020. The median
    sales price of new single-family houses sold in February was $349,400 ($346,400 in January). The
    February average sales price was $416,000 ($408,800 in January). The inventory of new single-family
    homes for sale in February represents a supply of 4.8 months at the current sales pace, up from the
    January estimate of 4.2 months.


  •  Manufacturing: The manufacturing sector took a step backward last February as industrial production
    decreased 2.2%, the first such decline since last October. According to the Federal Reserve's report,
    industrial production advanced 1.1% in January. Manufacturing output fell 3.1% in February following
    January's 1.0% increase. Mining production dropped 5.4% in February after advancing 2.3% in January.
    February saw the output of utilities increase 7.4% after declining 1.2% the prior month. Total industrial
    production in February was 4.2% lower than its year-earlier level. According to the report, the severe
    winter weather in the south central region of the country in mid-February accounted for the bulk of the
    decline in output for the month.


  •  For the first time in 10 months, new orders for durable goods decreased, falling 1.1% in February after
    climbing 3.5% in January. Transportation, down following five consecutive monthly increases, led the
    decrease, sliding 1.6%. New orders for nondefense capital goods rose 5.6% in February after increasing
    6.2% the previous month. A 103.3% increase in nondefense (commercial) aircraft and parts drove the
    jump in nondefense capital goods. Defense capital goods followed a 0.9% January decline by
    nosediving 10.6% in February.


  •  Imports and exports: Both import and export prices rose higher in February for the third consecutive
    month. Import prices climbed 1.3% in February following a 1.4% increase in January. Import prices rose
    3.0% over the past year, the largest 12-month advance since increasing 3.4% from October 2017 to
    October 2018. Import fuel prices rose 11.1% in February following a 9.0% increase in January. The
    February rise was the largest advance since import fuel prices increased 15.2% in July 2020. Import fuel
    prices rose 6.5% over the past year, the first 12-month advance since a 13.2% increase in January
    2020. Nonfuel import prices rose 0.4% in February following a 0.9% advance in January. Export prices
    increased 1.6% in February after climbing 2.5% in January. For the year ended in February, the price
    index for exports rose 5.2%, the largest 12-month increase since the index advanced 5.3% in June
    2018. Agricultural export prices increased 2.9% in February following a 6.0% jump in January.
    Nonagricultural exports rose 1.5% in February after increasing 2.2% in January.


  •  In February, the international trade in goods deficit was $86.7 billion, up 2.5% over January's deficit.
    Exports fell 3.8% and imports declined 1.4%. For the 12 months ended in February, exports have fallen
    5.4%, while imports have jumped 10.1%.


  •  The latest information on international trade in goods and services, out March 5, is for January and
    shows that the goods and services trade deficit was $68.2 billion, 1.9% over the December deficit.
    January exports were $191.9 billion, or 1.0%, more than December exports. January imports were
    $260.2 billion, or 1.2%, more than December imports. Year over year, the goods and services deficit
    increased $23.8 billion, or 53.7%, from January 2020. Exports decreased $15.7 billion, or 7.6%. Imports
    increased $8.1 billion, or 3.2%.


  •  International markets: Inflationary pressures may be ramping up globally. February saw consumer
    prices increase in several nations, including France, Germany, Italy, Canada, China, and Japan. In the
    markets, the EURO STOXX Europe 600 Index gained about 4.1% in March; the United Kingdom's FTSE
    inched up 1.1%; Japan's Nikkei 225 fell 1.3%; and China's Shanghai Composite Index plunged nearly


  •  Consumer confidence: The Conference Board Consumer Confidence Index® surged in March to its
    highest reading in a year. The index stands at 109.7, up from 90.4 in February. The Present Situation
    Index, based on consumers' assessment of current business and labor market conditions, increased
    from February's 89.6 to 110.0 in March. The Expectations Index, based on consumers' short-term
    outlook for income, business, and labor market conditions, rose from 90.9 in February to 109.6 in March.

Eye on the Month Ahead

The economy in general, and the stock market in particular, should continue to progress as more vaccines
are rolled out and more jobs are made available. Investors will continue to watch for signs of escalating
inflation, despite the Federal Reserve's forecasts to maintain interest rates at their present levels through


Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation);
U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City
Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance:
Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S.
Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK);
www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based
on reports from multiple commonly available international news sources (i.e. wire services) and are
independently verified when necessary with secondary sources such as government agencies, corporate
press releases, or trade organizations. All information is based on sources deemed reliable, but no
warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion
expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be
relied on as financial advice. Forecasts are based on current conditions, subject to change, and may not
come to pass. U.S. Treasury securities are guaranteed by the federal government as to the timely payment
of principal and interest. The principal value of Treasury securities and other bonds fluctuate with market
conditions. Bonds are subject to inflation, interest-rate, and credit risks. As interest rates rise, bond prices
typically fall. A bond sold or redeemed prior to maturity may be subject to loss. Past performance is no
guarantee of future results. All investing involves risk, including the potential loss of principal, and there can
be no guarantee that any investing strategy will be successful.


The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded
blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common
stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index
is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell
2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow
is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar
Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies.
Market indices listed are unmanaged and are not available for direct investment.

Important Disclosures

This information has been designed for general informational and educational purposes only and does not
constitute an offer to sell or a solicitation of an offer to buy any security. Such offers can only be made
where lawful under applicable law. These materials have been obtained and derived based on information
from public and private sources that Zhang Financial LLC believes to be reliable. However, no
representation, warranty or undertaking, stated or implied, is given as to the accuracy or completeness of
the information contained herein, and Zhang Financial LLC expressly disclaims any liability for the accuracy
and completeness of this information. Zhang Financial LLC does not intend to provide investment advice
through these materials and does not represent that any market position, economic forecast, securities or
services are suitable for any investor. Investors are advised not to rely on these materials in the process of
making a fully informed investment decision and they do not render business, tax or legal advice. Each
client or prospective client should consult his/her own attorney, business advisor and tax advisor as to
legal, business, tax and related matters concerning the information contained herein. The information,
opinions and views contained herein have not been tailored to the investment objectives of any one
individual, are current only as of the date noted and may be subject to change at any time without prior
notice. Past performance does not guarantee future results. All investing involves risk of loss including the
possible loss of principal.


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