Quarterly Commentary – March 2021

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The first quarter of 2021 saw the US Equity Markets continue their ascent and finish with relatively nice gains. The following are performance numbers from various popular indexes. Please remember index numbers are not individually comparable to a properly diversified portfolio. Each portfolio may include an allocation to securities similar-to these indexes in varying amounts based on your personal risk tolerance and should only be compared in that context. The S&P 500 was up 6.4% for 2021. The Dow Jones Industrial Average was up 8.3%. The Nasdaq Composite Index was up 2.9%. The Russell 2000 Index was up 12.7%. International equities as represented by the MSCI AC World Ex U.S. Index were up 3.5%. The MSCI Emerging Markets Index was up 2.3%. Fixed Income as represented by the Barclays Aggregate Bond Index ended down 3.4% for the year.

The Covid lockdowns were unprecedented in modern times and induced a global economic contraction that was anything but typical.  Historically, slowdowns come from reaching some form of overcapacity which tends to lead to falling prices. Capacity will then adjust down to meet reduced demand.  In this case the slowdown was forced and immediate.  It follows that coming out of that situation would be just as unprecedented.

The equity markets on the surface have appeared to make gradual moves.  Under the surface things have been anything but gradual with various types of equities posting very disparate performance numbers. Small Cap Value hit it out of the park so far this year being up over 24%, while Large Growth type companies have been relatively weak, up around 2%. Many factors are at play with various rotations taking place within equities as the economy re-opens and different areas are expected to do better and investors quickly assess a fast-changing landscape.  We witnessed a flip flop of sort as those stocks that did well in 2020 gave up some gains, while those that underperformed came back to life. We have had a few weeks of sideway action in March which allows consolidation to occur as market participants take the time to re-assess.

Growth should be robust ahead as the reopening of worldwide economies progresses with vaccinations, pent-up consumer demand and global monetary and fiscal support of extreme proportions.  This growth could push higher rates and put a damper on economic growth and valuations.  The jump in the 10-year Treasury rate did temporarily spook investors.  Equities should continue to do well while bonds might be challenged. Short term inflation could jump, but it is probably less likely to be persistent as there are deep undercurrents related to demographics, the benefits of technology and global trade that create a powerful counterbalancing effect.  Also, one can argue that the standard way of measuring inflation may not be as relevant given the drastically changed environment.  The Consumer Price Index (CPI) is based on a basket of goods and services that Americans may have spent money on in the past, but certain types of spending have changed during the pandemic.  Travel, entertainment, restaurants, clothing among many are no longer consistent with the past.  Then there is some gap in the data given how researchers collect this data because of 2020 and the move to online shopping in a drastic way.  There may be a significant amount of inflation that just has not been detected. 

We are dealing with many unknowns, but the sheer amount of liquidity available that will make its way into many areas of the economy and certainly equities will make it dangerous to bet against it. 

We wish you nice Spring and are thankful for the opportunity to provide guidance during these interesting times!