1Q21 MARKET OVERVIEW
With the support of a democratic controlled Congress, Joe Biden was sworn in as the 46th president of the United States in January. Although investors were a bit on edge related to the possibility of higher income taxes to support President Biden’s policies, they shrugged off concerns and instead focused on additional fiscal and monetary stimulus that helped equities advance higher.
Moving forward, attention will turn to the recent spike in Covid-19 cases and how quickly we can reach herd immunity. Regardless of the market direction, our disciplined process will utilize market changes to shift towards our target allocations in the most tax-efficient manner possible while maintaining your desired risk level and fulfilling your cash flow requirements.
U.S. Equity Markets
U.S. equity markets extended gains from the March 2020 lows with the Russell 3000 adding 6.4% during the quarter and 63% return over the past year. With the U.S. leading the global stimulus and vaccine rollout efforts, markets celebrated the exceptional near-term economic growth prospects. The passage of the March $1.9 trillion American Rescue Plan Act of 2021 helped round out the positive quarter since this stimulus package could accelerate economic growth to 7.0% in 2021 based on most economists’ predictions. These estimates seem possible given the scale and scope of the spending while continuing efforts to suppress the impact of Covid-19. In addition to these developments, the U.S. economy added 916,000 jobs in March and the unemployment rate dropped to 6.0% according to the U.S. Bureau of Labor Statics. All this upbeat news boosted consumer confidence as they started looking to the future with plans to spend money on travel and entertainment rather than home improvement projects. The U.S. expansion trajectory is looking bright, especially if herd immunity can be reached by mid-summer.
International Equity Markets
International developed equity markets finished the quarter with a 3.5% gain for the MSCI EAFE. A slower rollout of Covid-19 vaccinations in the Eurozone compared to the U.S. and UK tempered economic expectations since only about 10% of the population received at least one dose through mid-March. With infection rates rising, new lockdown measures will likely delay a full Eurozone recovery until the third quarter. Japan’s sluggish vaccine approval process will holdup reaching herd immunity goals as quickly as anticipated. Although Japan did benefit from the Olympics construction activity, they are not likely to reach full economic potential in 2021 if overseas spectators are banned from the Tokyo Olympics. The MSCI emerging markets rose 2.3% during the quarter. China was the first to tame the virus and seems well positioned to continue their accelerated recovery trajectory with 6% economic growth target for 2021. Both developed and undeveloped international markets look more attractive from a valuation perspective compared to U.S. markets once the vaccine rollout takes hold.
Fixed Income Markets
Safety-minded investors experienced disappointing results as the closely watched Barclays Aggregate lost 3.37% during the quarter. In anticipation of Federal Reserve tightening to align with encouraging vaccine and stimulus news, interest rates moved off historic lows. The 10-year Treasury yield marched higher during the quarter from 0.93% on December 31 to 1.74% on March 31. Given the yield increase, it is not surprising that longer dated U.S. Government securities lost considerable value. The Barclays U.S. Government Long posted a 13.39% quarter loss, Intermediate 1.72% loss and Short 0.05% loss. In the international fixed-income arena, the JPM Non-U.S. Unhedged lost 6.4%. The Barclays Municipal finished the quarter with a modest loss of 0.35% as tax-sensitive investors digested the prospects of higher interest rates much better than most fixed income markets given the likelihood of higher taxes on the horizon.