Key Investment Perspectives: February 2021
The world’s attention in the opening month of 2021 was riveted on the January 6 storming of the US Capitol and the presence of thousands of National Guardsmen in Washington for the Biden-Harris inauguration. In addition, an epic short squeeze involving a multi-billion-dollar hedge fund, a Reddit investing forum composed of retail investors, and the shares of GameStop caused equity market volatility to spike toward the end of the month.
These were significant events to be sure, but the bigger picture offers encouraging news. The arrival of vaccines and the ramp-up of COVID-19 inoculations hopefully herald the peak of daily infections and the beginning of the end to the global pandemic. Investors could then start looking toward the end of global lockdowns and a resurgence in economic activity. The next few months may be rocky, but we believe that the underlying trend in the global economy is one of recovery and expansion.
- Equities: US equities as measured by the Russell 3000 Index ended the month down 0.44%. There was meaningful dispersion of returns across capitalization size: Large caps declined 0.82% for the month while small caps were up over 5.0%. Growth outperformance over value took a pause after an exceptional run in 2020. Developed international markets declined by 0.82% while emerging markets rallied by just over 3.0%.
- Fixed Income: The Bloomberg Barclays US Aggregate Index was down 0.72% for the month. Investment-grade corporate bonds fell 1.28% and US Treasuries declined by 0.96% as higher inflation expectations continue to work themselves into a steeper yield curve. While US fixed income posted strong results in 2020, we believe investors should not expect similar returns in the future.
- Tactical Asset Allocation: We continue to favor equities relative to bonds and recently neutralized our allocation of US equities vs. international based on a broadening global expansion, headwinds to the US dollar, and greater cyclical exposure. We also initiated a position in a diversified portfolio of real assets. While we are not forecasting a high-inflation environment, the risk of an inflation surprise has increased with direct fiscal and monetary coordination.