- Rising interest rates, stimulus relief, and progress in reopening the economy were the major themes driving markets in the first quarter.
- Increased economic growth and rising inflation expectations pushed the yield on the 10-year Treasury up to 1.7%, significantly above the 0.9% yield to start the year. Core bonds suffered as investors repriced safe assets, with the Aggregate Bond Index declining 3.4% over the quarter. Credit held up relatively well as spreads remain tight.
- Equities rose due to the brighter outlook, and small-cap momentum carried over to start 2021. Small caps, value styles, and economically sensitive areas of the market were the biggest gainers in Q1.
- Now, a full year after the market’s bottom, the trailing one-year returns are eye-popping, with small-cap equities gaining nearly 95%.
- The U.S. has made solid progress distributing vaccines, particularly when compared to European peers. Checking in on mobility data also paints a promising picture in the U.S. as airline passengers and restaurant activity has climbed to the highest levels since lockdowns began — trends that should continue to aid in finalizing the recovery, as long as the spread of the virus remains in check.
- Hindsight is always 20/20, but now a year after the market bottom, sizing up the recovery adds perspective to how remarkable the past twelve months have been and how important unemotional decision-making can be for achieving investment success.
- Few would have anticipated markets to climb a wall of worry to reach all-time highs as the disruptive forces of a pandemic, a polarizing election, and widespread uncertainty were overcome by the massive levels of stimulus, and the miracle of science produced several successful vaccines.
- The economic recovery is not yet complete, but the sharp rebound has been surprisingly positive, and thanks to the tailwinds of elevated savings levels, vaccine distribution, and an eagerness to resume social activities, forecasters are anticipating the coming quarters will reflect some of the highest levels of economic growth in decades.
- Clearly, markets at current levels have baked in much of this good news, and based on traditional measures, few bargains remain to be found. But high prices alone are not justification for a market crash, and strengthening economic fundamentals should be supportive of risk assets.
- Equities, when compared on a relative basis to other asset classes such as core bonds, appear more reasonably priced.
- As the real economy continues to reopen and growth and inflation pick up steam, companies closely related to traditional economic activities should continue to benefit. Approval of an infrastructure spending plan may provide a further boost to cyclical areas of the economy as well.
- Despite the outperformance of value styles over the past few months, on a trailing three-year basis, growth continues to lead by a sizable margin. Additionally, value style equity valuations are more attractively priced when compared to their growth counterparts.