Broker Check

Market Commentary

April 21, 2021

 

Reopening optimism drives US stocks
to all-time highs in Q1


The year of transitions got well underway in the First Quarter of 2021, as reopening optimism was the underlying force that helped drive US stocks to all-time highs. Accelerating vaccine distribution, historic Fed accommodation, and the $1.9 trillion American Rescue Plan all contributed. However, it wasn’t without its challenges, including the horrendous January 6 attack on the US Capitol, a second impeachment trial, the inauguration transfer of power to the new Biden-Harris administration, mixed but encouraging economic data, rising interest rates, and late month-end market volatility in February and March. Not to mention COVID lockdown setbacks overseas.

Nonetheless, the global markets remained focused on the brightening light at the end of the tunnel as vaccine distribution accelerated throughout Q1. It’s remarkable that at the beginning of the quarter the 7-day moving average of daily vaccinations in the US was 397,376 and by the end of March it hit 2.9 million, according to the CDC, far surpassing goals and expectations. The old normal could again be the new normal if things keep progressing well.

With reopening optimism accelerating, US stocks hit multiple new all-time highs throughout Q1 and were led by the more cyclical mid- and small-cap stocks, as well as the Dow Jones Industrials. The mid-cap S&P 400 jumped 13.1%, while the small-cap Russell 2000 surged 12.4%. The Dow Industrials surpassed 33,000 for the first time ever in March and closed up 7.8% for the year. Interestingly, the First Quarter was a near mirror image of 2020, when technology and communications growth companies dominated in the COVID lockdown economy. Q1 saw a rotation to value, cyclical and industrial stocks, more of which are found in the Dow Jones Industrial Average, which lagged in 2020. The tech-heavy Nasdaq gained 2.8% in Q1 but even briefly dipped into negative territory in early March before recovering. The benchmark S&P 500 gained 5.8% in Q1. Growth stocks have dominated value stocks for over 10 years, and many are wondering if Q1 is the start of a new long-term trend or a short-term rotation. Time will tell so in the meantime we highly encourage diversification.

While states across the US continue to reopen at varying paces and in fits and starts the trend has remained in the right direction. However, countries overseas have been mired in COVID lockdown setback despite rising vaccine distribution. Economic growth projections remain solid though. The MSCI EAFE index posted a gain of 2.8% in Q1, while emerging markets edged higher by 2.0% and hit a new all-time high in February. Valuations overseas remain compelling after roughly ten years of underperformance to the US and we’ve bumped up our International allocations for the first time since 2017 (Model Portfolio Allocations). Yet, we remain underweight.

Interest rates, intermediate and longer- term, rose sharply in the First Quarter fueled by reopening optimism and rising inflation concerns boosted by the Fed’s continued historic monetary support and the new fiscal stimulus in the $1.9 trillion American Rescue Plan. The 10-year Treasury Note yield jumped 0.81% in Q1 to 1.74%, which contributed to the 3.4% decline in the benchmark Bloomberg Barclays Aggregate Bond index. Remember, bond prices and yields move in opposite directions. The result was a steepening of the yield curve, but this is healthy and rates have risen for the right reason. The Fed raised its GDP forecast to +6.5% from +4.2% in December at its March meeting, but remained committed to keeping interest rates low and accommodation high. The unemployment rate fell to 6% in March but remains well above the Fed’s goal. Signs of inflation have increased by some measures but remain below Fed targets.

The Outlook
We anticipated 2021 to be a year of transitions and First Quarter results show that from a health, economic and market perspective, we are well on our way. Yet, we must remain vigilant on defeating COVID-19 and the pandemic so we can return to the old normal. On March 23, we hit the one-year anniversary of the COVID market sell off. Unprecedented monetary and fiscal support resulted in 12-month returns across board that are among the best in history, including the S&P 500’s best since 1936 at +74.9%, while the Russell 2000 led with a gain of 118%. This is the latest evidence of “don’t try to time the market.”

We remain cautiously optimistic and while there are many encouraging positives, we don’t want investors to get complacent with risk. 

  • Q1 Earnings expectations exceed 23% and best since 2018 (FactSet)
  • New Biden $2 trillion infrastructure and jobs fiscal stimulus plan announced 3-31-21 lends further economic growth support if passed
  • Valuations remain stretched; a pullback/consolidation would not be a surprise; volatility expected to increase in Q2 but refrain from changing course
  • Baring a setback, full economic reopening still remains more of a second half transition story coinciding with broad to full vaccine distribution; economic growth projections remain strong for 2021 at +6.5% (Fed)
  • Maintain diversification, discipline and keep your focus long-term
  • Refrain from chasing returns and making large portfolio changes
  • Maintain regular contributions and a rebalancing program

We continue to wish you good health and encourage investors remain patient with the measured reopening process until the vaccine is effectively distributed, stay vigilant and keep your focus long-term.

Call your Nelson Advisor today at 800-345-7593 to discuss any concerns and review your portfolio, including 2020-2021 IRA contributions.  

 

~Your Nelson Securities Team