The market posted a solid gain in the first quarter of 2021, despite the 10-Year Treasury yield increasing over 0.8% in the quarter as investors contemplated the implications of another stimulus bill and whether the Federal Reserve may be forced to rein in inflation sooner-than-expected. Higher yields contributed to market volatility in the quarter but increasing confidence in the economic recovery ultimately boosted stocks for the quarter.
Small-cap stocks continued to outperform large-cap stocks in 1Q21, likely reflecting increasing optimism as vaccinations progress at a faster-than-expected pace and economic stimulus that should further bolster economic growth in 2021. Increasing confidence in the economic recovery and higher yields also drove a sell-off in growth and technology stocks (the Nasdaq dropped almost 12% from its peak) as investors favored cyclical and value stocks; value stocks outperformed both blend and growth stocks but all categories produced positive returns for the quarter.
International developed markets outperformed emerging market stocks, but both the MSCI Emerging Market and MSCI EAFE indices underperformed U.S. indices as slow vaccine rollouts and increasing case counts pressured international markets and economies.
The underlying economy showed signs of strong recovery at the end of 1Q21; nonfarm payrolls rose by 916,000 beating the consensus forecast of +675,000, the unemployment rate dropped to 6%, and labor force participation rose to 61.5% (versus 63.3% in February 2020). States across the country continue to reopen and business activity is close to pre-pandemic levels, although there are pockets of surging coronavirus case counts, and manufacturing has also seen a spike in activity. The recently passed stimulus bill and a potential infrastructure spending bill should help support economic growth throughout 2021 and into 2022.
We still believe numerous tailwinds should result in solid 2021 market returns, however a great deal of uncertainty remains as the country navigates through an unprecedented time which includes an ongoing recovery from the pandemic, (still) historically low interest rates, a large amount of government stimulus, and a new Federal Reserve policy regime. We believe maintaining a balanced and well-diversified investment approach is critical for producing superior risk-adjusted returns, while continuing to look for investment opportunities to deploy capital.
|Index||1st Quarter 2021||Year-to-Date|
|Dow Jones Industrial Average||8.29%||8.29%|
|Bloomberg Barclays U.S. Agg Bond||-3.37%||-3.37%|
|MSCI EAFE Index||3.60%||3.60%|
|MSCI EM Index||2.34%||2.34%|
Sources: Y Charts and J.P. Morgan Asset Management
Data as of March 31, 2020. Past performance cannot guarantee future results.
This information is intended for educational purposes only. It is not intended to provide any investment advice or provide the basis for any investment decisions. You should consult your financial adviser prior to making any decision based on any specific information contained herein.
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Tags: Market Recap