News & Insights
First Quarter 2021 Commentary
Investments and the Economy
The S&P 500 finished the first quarter of 2021 on a positive note, posting a return of 5.7%. However, the market was led by cyclical sectors hit hardest by the COVID-19 pandemic and ensuing lockdowns; a trend we expect to continue as the year progresses. Energy, Financials, and Industrials, which were among the worst performers in 2020, saw positive momentum continue from the fourth quarter of 2020 and were the top three best performing sectors to start 2021.
After years of lagging, large company value stocks outperformed large company growth stocks during the quarter. The rally in value stocks was precipitated by the massive government stimulus measure and the COVID-19 vaccination rollout, both of which boosted optimism for economic growth.
Consumer confidence rose to its highest level since the pandemic began and the unemployment rate settled at 6.2%, although above pre-COVID levels, it is the lowest mark since the pandemic began, and manufacturing activity is showing signs of expansion. Not surprisingly, economic data is trending in a positive direction as attitudes begin to shift and the economy reopens.
After two straight years of outsized performance, the bond market experienced a negative return, down -3.37 % for the quarter as measured by the Barclays US Aggregate. The selloff was driven by stronger than forecasted economic growth as discussed above and the $1.9 trillion stimulus package enacted during the quarter, which moved both inflation expectations and long-term interest rates to the upside (more on that below).
The rotation in equity market leadership to companies that are more sensitive to economic momentum comes as no surprise as we see success in the rollout of vaccinations. A ramp up in the supply of vaccine doses as well as the number of locations where citizens are able to have a dose administered is rapidly reaching a critical inflection point. It is expected that supply will likely outpace demand fairly soon, although it continues to be our hope that each and every person eligible to receive a dose, will seek one out. Nonetheless, equity markets are pricing in this continued positive news. In the U.S., vaccination of adults is increasing every day. If the current pace continues, we could see 50% of the population fully vaccinated by late May – a meaningful acceleration of the timeline expected just a few short months ago.
Efficacy data from the three major vaccine makers suggests that the current vaccines are effective in preventing the spread of the disease. Just as importantly, the data also suggests the vaccines are effective in fighting against most known mutations, one of the biggest risk to the re-opening of the economy.
The recent movement in the 10 year Treasury rate from 0.93% at the start of January to ~1.60% at quarter end reminds us of the mini “taper tantrums” we experienced in 2013. Back then, equity prices came under pressure when yields spiked as a result of the Fed hinting that it would no longer be as accommodative in interest rate policy. However, the interest rate moves seen in the first quarter of 2021 are not the same.
Today, the Fed has made clear they are not contemplating any form of interest rate tightening. In fact, Chairman Powell and the Federal Reserve indicated that the unemployment rate would need to be considerably lower before they took any steps to tighten or raise interest rates and they do not expect to raise interest rates until at least 2023.
The massive economic stimulus and the reopening of the economy will make inflation a hot topic for the near future. The reality is that no one will be able to predict what happens with inflation. Stocks and bonds could remain volatile during this time, but we do not believe this equates to a reason to abandon a well-diversified portfolio.
What to Expect
We are still in the midst of a period of great disruption. Many people have suffered physically, emotionally and financially as well. At the same time, new innovations have been developed opening up new opportunities in the way we communicate, conduct business, and consume information and services. As investors, we marvel at the seemingly bottomless well of creativity that exists and leads to the opportunity for wealth creation. Of course, periods of great disruption are oftenmet with unusual levels of volatility, and we will not be surprised to experience this over the course of the year. As we have written in the past, in a typical calendar year, the S&P 500 is down on average 15% at some point during the year. The economic conditions are such, that we believe any market down turn should be viewed as a buying opportunity. We continue to believe the backdrop remains very positive for equities. For our clients, the recommended approach remains intact; set goals, work with us to develop a plan and then execute on a well thought out strategy to allocate capital into an investment portfolio designed specifically to achieve those goals with as little risk as is necessary.
Please stay safe, be well, and get vaccinated when you can.
The Information contained in this document is based on data received from third parties which we believe to be reliable and accurate. YorkBridge Wealth Partners, LLC has not independently verified the information and does not otherwise give any warranty as to the truth, accuracy, or completeness of such third party data, and it should not be relied upon as such. Any opinions expressed herein are our current opinions only. YorkBridge Wealth Partners, LLC is an SEC Registered Investment Adviser under the Investment Advisers Act of 1940 (“Advisers Act”). Registration of an investment advisor does not imply any specific level of skill or training. The information contained in this document is to assist with general planning. Please consult with your own tax advisor and attorney for more specific information.