- Equities continued to edge higher in March with a solid 4.38% return for the S&P500 as the US economy continues to slowly open up.
- Sectors that performed well in 2020 have underperformed so far in 2021 with technology lagging while cyclical sectors were the winners.
- Inflation concerns pushed long dated Treasury yields higher in March.
Equities drove higher in March, ending a strong first quarter to start the year. The S&P500 gained 4.38% for the month and 6.17% for the year as the economy continues to slowly get back on track. Utilities led the way gaining 10.51% after a bruising February where rising rates hurt many dividend paying stocks. All sectors of the S&P500 were positive with Information Technology the worst performer (+1.69%) as elevated valuations and higher rates weighed on returns. Investors have shifted away from sectors that benefited most during the pandemic as the trend towards value over growth stocks continued in March with the Russell 1000 Value gaining 5.88% vs. 1.72% for the Russell 1000 Growth. This rotation typically occurs during the early stages of an economic recovery where energy (+30.85%), financials (+15.99%) and industrials (+11.41%) have led the market higher in the first three months of 2021.
Inflation concerns creeped back into the minds of investors from the Fed’s easy monetary policy, rising budget deficits and pent-up demand. Interest rates have moved significantly higher as a result, with the 10yr Treasury yield at 1.75% vs. 0.92% to star the year. However, there is slack in the economy with unemployment still north of 6%. Wage inflation, usually a requisite for price inflation, may be unlikely until we achieve a tighter labor market. The rise in mid- and long-term Treasury rates have caused bond prices to fall. The Bloomberg Barclays US Aggregate Bond Index dropped 1.25% in March and is down 3.37% for the year.
International stocks have lagged the US markets to start the year with fresh lockdowns in Europe. Rising COVID cases coupled with a sluggish vaccination distribution have given investors pause across the Eurozone. Asian markets were down in March with the MSCI China index dropping 6.28%. Chinese policymakers indicated their intent to remove stimulus measures to prevent asset bubbles.
The outlook for the remainder of the year for investments, as with any other year, will largely be determined by the state of the economy. With equities performing so well over the last 12 months the market could be vulnerable to near term setbacks. Diversified portfolios can mitigate the risks of asset bubbles in sectors and asset classes. Fortunately, the path toward herd immunity from this bruising virus only gets closer by the day.