One year into the equity bull market!

Reflation is just one stop on the road to recovery

“Straight roads do not make skillful drivers.”

– Paulo Coelho, The Alchemist

It’s been quite a year! This time last year, the S&P 500 was hitting a trough, down 35% from its peak on February 19. The world was only beginning to understand the COVID-19 virus and many thought the virus would only impact our lives for a short period of time. The bad news, of course, is that we’re still dealing with the virus as a society and are likely to be dealing with the after-effects for some time. The good news is that we’ve developed effective therapeutics along with many effective vaccines that are in the early stages of rollouts around the world, giving hope that we’ve turned the corner in this health crisis.

From an investment perspective, the good news is that the S&P 500 Index is up 78%, on a total return basis, from its low on March 23, 2020. The equity market suffered both its fastest bear market and one of its fastest recoveries in history. The March 23 low coincided with an announcement by the Federal Open Market Committee (FOMC) that they were essentially “all-in,” from a monetary policy perspective, to support the economy with unlimited asset purchases and ultra-low, short-term interest rates. We now know that this was the beginning of the bull market.

The reflationary period of an economic cycle is typically the period immediately following the bottoming of the recession. It’s defined as expansion in the level of an economy’s output by government stimulus, using either fiscal or monetary policy. While some may lament that the reflation trade in the equity markets may be over, given the recent and rapid increases in commodity prices, stock markets, and long-term bond yields, we argue that the economic reflation has only just begun. We believe that long bonds and equity markets reflect the normalisation phase of the economic recovery and have more room to move higher.

Market indicators

One year ago

March 23, 2021


U.S. 10-year Treasury yield



+90 bps

U.S. 2-year Treasury yield



-16 bps

10-2 year spread

positive 48 bps

154 bps

+106 bps

Market indicators

One year ago

March 23, 2021


S&P 500 Index




Dow Jones Index




Nasdaq Index




S&P/TSX Index



Source: Manulife Investment Management, Bloomberg, as of March 22, 2021

When analyzing the market environment, one of the first things our team looks at is the risk of recession, as this is often the main catalyst to a prolonged market downturn. When reviewing the fundamental data, there are no signs of a risk of a double-dip recession.

Signs of a recession

Present today

Inverted yield curve


ISM manufacturing index below 45


Positive inflationary trends


Tighter financial conditions


Housing starts declining


Labour market weakening


Leading economic indicators negative

*Yes (but trending positive)

Source: Manulife Investment Management, as of February 28, 2021

While some data such as the ISM Manufacturing Purchasing Managers’ Index (PMI) may be peaking and could start to roll over, we believe there’s little fear of an economic stall-out given the still massive amounts of fiscal and monetary stimulus that need to work their way through the U.S. and global economies.

ISM Purchasing Manager Index
Last 20 years

Here’s a graph that shows the ISM Purchasing Manager’s Index level from 2001 to 2020. The graph indicates that the index has been trending upward for the last year and is approaching it’s 20-year high, set in 2004.
Source: Manulife Investment Management, Bloomberg, as of February 28, 2021

When examining PMI, we must remember this is a relative index that measures the change in various inputs on a monthly basis. Even if we were to see the index value roll over and begin to decline from current levels over the next few months, this would simply imply that the month-over-month change (or delta) is slowing rather than moving negative. It’s also important to look at some of the underlying aspects of manufacturing — such as backlog of orders, new orders, and inventory — to see what’s driving the direction of the overall index level.

The backlog of orders index registered 64 percent in February 2021 — an increase of 4.3 percentage points from January — and is its highest level in the history of the PMI.

ISM Manufacturing Report on Business Backlog of Orders
Last 20 years

Here’s a graph that shows the change in numbers from the ISM manufacturing report on order backlogs, from 2001 to 2021.
Source: Manulife Investment Management, Bloomberg, as of February 28, 2021

This high reading of backlogs shouldn’t be surprising considering the supply chain disruptions that have occurred as a result of pandemic-induced lockdowns over the past year, China-U.S. trade tensions, and more recently, weather issues in Texas and clogged ports in California. The backlogs cover many goods, from lumber to semiconductors and just about everything in-between. For example, the shortage in semiconductors is forcing some companies such as Toyota, Honda, and Samsung to halt production at some plants.

Federal Reserve Chairman Jerome Powell said at a press conference Wednesday that he expects supply chains to adjust as economic growth accelerates: “… it’s very possible, let’s put it that way, that you will see bottlenecks emerge and then clear over time. … these are not permanent. It’s not like the supply side will be unable to adapt to these things. The market will clear. It just may take some time.

We believe what could further complicate supply chain disruptions is a strong increase in demand as consumers emerge from lockdown with excess savings and a desire to spend. According to the Bureau of Economic Analysis, Americans have 250% more in savings as a percentage of disposable income vs January 2020. The Total Business: Inventories to Sales Ratio, as measured by the Federal Reserve Bank of St. Louis, is near its all-time low, last reached in 2011. This low ratio should lead to continued elevated levels of manufacturing, an improved economic environment, and stronger earnings growth.

Total Business: Inventories to Sales Ratio (Seasonally Adjusted)
1992 - Current

This graph that shows the Total Business: Inventories to Sales ratio (seasonally adjusted) from 1992 to January 31, 2021.
Source: Manulife Investment Management, Federal Reserve Bank of St. Louis, as of January 31, 2021

Nothing has changed from our “rapid reopen” thesis that we wrote about in our 2021 outlook. We wrote that “we must remain focused — forward-looking — not on the risks that may arise in the near-term as we transition from an environment where COVID-19 continues to rage, but to an environment 12 months from now where more of the global population is protected against COVID and we enter an environment that we call the rapid reopen.

As the bull market turns a year old, we may be hitting peak valuations and beginning the transition to earnings growth as the driver of equity market returns.

Our team often uses the quote from Mark twain, “History doesn’t repeat itself, but it often rhymes.” While the path to recovery may appear different, the destination is the same. Given the solid economic environment, we caution investors against any knee-jerk reactions to market movements and would embrace any short-term pullbacks as an opportunity, not a threat.

Kevin Headland, CIM
Senior Investment Strategist

A rise in interest rates typically causes bond prices to fall. The longer the average maturity of the bonds held by a fund, the more sensitive a fund is likely to be to interest-rate changes. The yield earned by a fund will vary with changes in interest rates.

Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a fund’s investments.

The opinions expressed are those of Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information and/or analysis contained herein. Manulife Investment Management disclaims any responsibility to update such information. Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein.

All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management Limited, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Unless otherwise specified, all data is sourced from Manulife Investment Management.

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Macan Nia, CFA

Macan Nia, CFA, 

Co-Chief Investment Strategist

Manulife Investment Management

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Kevin Headland, CIM

Kevin Headland, CIM, 

Co-Chief Investment Strategist

Manulife Investment Management

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