2021 | 1st Quarter
Equity markets across the globe continued their upward trend in the first quarter as investors continued to believe that the acceleration in Covid-19 vaccinations and the monetary and fiscal stimulus steps taken in the U.S. and other developed countries will fuel rapid economic growth in 2021 and beyond. The S&P 500 returned 6.2% albeit with different leadership from what we have seen over the past year. As in the fourth quarter, small and mid-Cap stocks lead the way and were up roughly 13% for the quarter and more economically sensitive “value” stocks outperformed the large technology-oriented stocks that had led the market higher since last March. While the tech heavy NASDAQ index, which benefited from stay at home, work, entertainment, and shopping during the pandemic, still posted a positive return, investor preferences changed toward stocks that will benefit from the reopening of the economy and more normal business activity. There was an increase in volatility during the quarter as the market reacted to an increase in interest rates. While still historically low, the rapid increase in rates spooked markets mid-quarter as investors reevaluated allocations between stocks and bonds. International markets were also up for the quarter but trailed U.S. markets. Many international economies have been slower than the U.S. in rolling out vaccinations and have suffered renewed spikes in infections that have slowed their recoveries.
Much like the fourth quarter of 2020, all sectors of the market were up in the first quarter with those that are most sensitive to economic recovery increasing the most. Energy was the best performer on the hopes that re-opening will increase travel and energy demand. Financials, Materials, and Industrials also performed well due to increased belief in accelerating economic growth and the hopes for further stimulus spending on infrastructure. Strong performers from last year, Technology and Consumer Staples, relatively underperformed, mostly due to rich valuations and the belief that other sectors offered better value.
With the exception of high yield debt, bonds produced negative returns in the first quarter as interest rates rose. The yield on the 10-year U.S. treasury note rose from just under 1% at year end to roughly 1.7% by the end of the quarter. The primary reason was the prospect of higher economic activity as the country emerged from lockdowns and the unprecedented amount of stimulus being enacted to combat the effects of Covid-19 on the economy. In addition to the initial $3 trillion relief package passed last spring, additional packages of $900 billion in December and another recently passed $1.9 trillion were enacted. Also, a roughly $2 trillion infrastructure spending bill is being discussed. Obviously, this adds up to a lot of money and the fear is that so much stimulus will eventually lead to inflation down the road when the economy gets back to full employment and sustained growth. By most measures, economic data has come in higher than expectations and unemployment, while still higher than before the pandemic, has steadily improved.
With the change in administrations and control of congress many policy changes are expected. Thus far the market has focused on the stimulus packages and the continued low interest rate and asset purchase programs of the Fed. At some point the market will have to come to terms with how these programs will be paid for and what changes in the regulatory environment are forthcoming and how they will affect different industries. Increases in both corporate and individual tax rates are being proposed but at this time it is uncertain what will be passed by congress.
While there are risks that policy changes and fluctuating interest rates will cause some volatility in a stock market that is by most measures at an elevated valuation level, we are maintaining higher exposure to equities based on the reality that bond yields remain unattractive and bond prices are vulnerable to higher inflation and eventually Fed policy changes. Our bond holdings remain concentrated in relatively shorter maturity bonds. As always, we will focus our portfolio holdings on companies that will continue to grow and provide solid financial results regardless of the economic or regulatory environment.
As always, please call with any questions.
Jonathan F. Kolle, CFA
President
Joseph K. Champness
Managing Director
Shawn R. Keane, CFP®
Vice-President
Rusty Giles
Director of Marketing
James V. Kelly, CFA
Director
The foregoing content reflects the opinions of Smithbridge Asset Management and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
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