April 8, 2021
First quarter headlines for 2021 were dominated by four key themes: successful vaccine rollouts, rising bond yields, historic fiscal stimulus, and a dovish Federal Reserve.
The United States has done a nice job getting vaccines into the arms of Americans and the initial goal of distributing 100 million vaccinations was quickly increased to 200 million. The success of the rollout in the United States has given markets a renewed optimism for a U.S. economic rebound as the Federal Reserve forecasts real Gross Domestic Product (GDP) growth in the range of 5.0% to 7.3% in 2021. This expected growth has put pressure on rising interest rates which helped value stocks outperform growth stocks in the first quarter. During this period, the S&P 500 Value Index gained 10.76% compared to 2.11% for the S&P 500 Growth Index. Rising rates have made 2021 a tough environment for Fixed Income products as the U.S. 10-year yield closed the quarter at 1.74% contributing to the Bloomberg Barclays Capital U.S. Aggregate Total Return Bond Index losing -3.37% in Q1.
Another reason for economic optimism is the massive amount of U.S. fiscal stimulus being injected into the economy. In Q1, a $1.9 trillion fiscal stimulus bill was passed to help families and businesses impacted by the Covid 19 pandemic and an additional $2.25 trillion infrastructure plan is in the works. These historical stimulus packages are putting pressure on U.S. inflation as the U.S. economy has seen rising consumer confidence, a reduction in the U.S. unemployment rate, and an increase in demand for goods and services. The Federal Reserve is concerned about a rising inflationary environment, but they continue to be extremely dovish and have said they are willing to let inflation run above their 2% target in the short-term to remain supportive of a rebounding economy.
We have seen the “Reopening Trade” in full effect as there has been a rotation out of frothy growth and technology stocks into value and stocks that will benefit from a United States recovery. In the short-term, it seems that this trade could persist as it will be supported by massive fiscal stimulus and a dovish FED. Over the last decade, we have seen that it is unwise to fight the FED so 2021 could be a positive year for U.S. stocks. However, if interest rates continue to climb and inflationary concerns become a reality, the FED might be forced to flip from a loose monetary policy to a more hawkish, tightened policy to contain inflation, which could cause the market to reprice.
The long-term model remained fully invested in March, but we did see some changes in the short-term model as we saw some consolidation near all-time highs, especially with the NASDAQ Composite Index struggling relative to the S&P 500 Index. In March, the S&P 500 Index bounced off its 50-day moving average as it made its way back to all-time highs. The NASDAQ Composite Index is a different story as it traded below its 50-day moving average for most of March. The NASDAQ Composite Index did bounce off support at its 100-day moving average, but it has yet to get back to its previous February high.
Clayton Wilkin, CFA
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies.
The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.
Bloomberg Barclays Capital U.S. Aggregate Total Return Bond Index is an unmanaged index of prices of U.S. dollar-denominated investment-grade fixed income securities with remaining maturities of one year and longer.
Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period.
The S&P 500 Growth Index is a market-capitalization-weighted index developed by Standard and Poor's consisting of those stocks within the S&P 500 Index that exhibit strong growth characteristics.
The S&P 500 Value Index is a market-capitalization-weighted index developed by Standard and Poor's consisting of those stocks within the S&P 500 Index that exhibit strong value characteristics.
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