Middlefield Market Commentary
Macro Update
by Dean Orrico, President & CEO?and Rob Lauzon, Managing Director & CIO
The S&P 500 Index generated a total return of 3.2% in March and 10.6% during the first quarter. It marks the fifth consecutive month of positive returns for the Index and the best five-month rally in four years. Volatility has been depressed over this period with the Index in the midst of its longest stretch without a 2% pullback in more than six years.
Historical trends suggest the rally may not be over – April is the second strongest month for the Index going back to 1950, with an average gain of 1.53% and only two negative Aprils over the past 15 years. Looking further out, when the Index has generated a 10% or better return in Q1, it has gone on to generate a positive return 92% of the time over the remainder of the year.
We continue to see encouraging signs that the market rally is broadening beyond large-cap tech stocks. Cyclical and value sectors led the market higher in March after lagging in the previous two months. This trend supported a 4.1% monthly return in the TSX Composite Index and vaulted it to a new record high. Surging prices of key commodities, including oil, copper and gold, have provided a boost to Canada’s resource industries with the TSX materials and energy sectors returning 15.4% and 7.3% in March, respectively. Middlefield has exposure to these sectors across several of our diversified equity-income mandates.
The underlying strength in commodity prices can be partially attributed to an increasingly positive economic backdrop. The latest jobs data revealed that U.S. job vacancies have stabilized and are no longer declining. Purchasing manager indexes in both the U.S. and China are back above 50 – the level that differentiates between expansion and contraction. The Atlanta Fed Q1 GDPNow model estimate rose to 2.8% on April 1st, up from 2.0% just two weeks prior. These data points all support robust consumer spending and manufacturing activity which traditionally leads to higher demand for commodity inputs. U.S. crude futures have surged to $85 a barrel for the first time since October, bringing its year-to-date advance to 19%.
The potential downside from all the positive economic data is that rates may have to stay higher than initially expected. February’s wholesale prices rose faster than anticipated, driven by rising food and energy prices. Despite the Fed’s March 20 meeting and ensuing press conference being widely interpreted as dovish, Chair Powell reiterated his stance that the Fed remains “prepared to maintain the current target range for the federal funds rate for longer if appropriate.” 10-year bond yields have risen as a result and finished the quarter at their highest level since November. Even so, the market has shrugged off rising yields and managed to hit new highs. We believe this is likely attributable to an improved earnings outlook that comes with a robust economy. This coincides with the recent strength in more cyclical pockets of the market which is a positive development for Middlefield’s diversified strategies.
About Middlefield:
Founded in 1979, Middlefield is a specialist and independent equity income manager headquartered in Toronto, Canada. Middlefield’s actively managed, award-winning funds are designed to be “investments that work for you” by distributing consistent and high levels of income through various market cycles. Middlefield’s funds span a number of market sectors including real estate, healthcare, innovation, sustainability, infrastructure and energy. Investors can access these strategies in a variety of product types including ETFs, Mutual Funds, Closed-End Funds, Split-Share Funds and Flow-through LPs. To learn more, visit www.middlefield.com.
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