- Rally On. Slightly over a year ago, equity markets bottomed following a sharp 30% decline in only twenty-two days. No market or sector was immune from the panic. Fear and uncertainty ruled the day, and pandemic-driven shutdowns across the global economy took their toll in employment and economic output. Despite the turmoil of the past year, it took a brief six months for the market to recapture its Covid-driven losses. The speed of the market’s rebound caught many by surprise, and patient investors who were not shaken from the markets were rewarded.
- Q1 Review. The first quarter of 2021 was largely dominated by rising bond yields, and a value-led equity market rally. The S&P 500 rose 6% to finish the quarter at a record close. Rather than being driven by a handful of large-cap tech stocks as in the past, the market rally is broadening out to include other areas such as value stocks and small caps, in anticipation of a sharp rebound in the economy.
- Inflation Rising. We are noting a rise in inflation pressures in several parts of the economy. Anecdotally, we are seeing a spike in lumber, used cars, and gasoline prices. For now, the main culprit lies with the pandemic-induced supply-chain disruptions. The shuttering of manufacturing plants and related supply operations during the pandemic, and the subsequent delay in getting them back online to meet the jump in demand, resulted in a supply-demand imbalance. It remains to be seen whether the inflationary pressures are transitory in nature, but we believe the bulk of the disruptions should ease over the next six to twelve months.
- Rising Treasury Yields. The 10-year US Treasury yield stands at 1.64% at time of writing. This contrasts with the 0.3% low in March 2020, and 0.9% at the start of the year. The size of the US stimulus, prospects for a healthy economic recovery, and rising inflation expectations all contributed to driving the move in higher rates. From a portfolio management standpoint, we are keeping bond portfolio durations relatively short, and increasing our exposure to inflation-protected securities.
- Stimulus Measures. Recently, the White House announced a multi-year, $2.25 trillion jobs and infrastructure plan, on top of the Administration’s $1.9 trillion Covid relief package that was passed in March. The latest package was the third and largest of the Covid stimulus bills. Led by government spending, the broadening rollout of vaccines, and continued fiscal and monetary policy support, the economy should continue to transition from hurting to healing over the course of the year.
- Market Outlook. For now, we remain cautiously optimistic on the prospects of the market. Economic data and sentiment surveys in the US continue to show strong improvements. Household net worth is surging to a new record high, and for the first time in a long time, US consumers have both the means and the desire to start spending again. We expect the rejuvenation in the economy to be reflected in corporate earnings as well, especially when the growth is viewed on a year-over-year perspective. The relative pace of the rise in yields does cause some concerns, although at current levels, rates remain low enough to not pose a significant threat to stock prices. We continue to monitor developments in this important market and how it will shape our investment thinking as we progress through the year.
Senior Portfolio Manager