Key Investment Perspectives: First Quarter 2021 Review
Large multi-directional moves in risk markets occurred in the first quarter of 2021 in response to civil unrest and to more-promising economic and company earnings data. US interest rates rose quickly on strong demand for goods and services as pent-up discretionary income and stimulus spending began to be unleashed. Globally, vaccine rollouts have been strong in some countries and weak in others.
An ambitious new 5-Year Plan was announced by China late in the first quarter. The main longer-term goal is to overtake the United States by 2035 in terms of economic might and scientific and technological capabilities. China fully intends to become a global powerhouse with little or no reliance on western powers. Only time will tell if there will be more cooperation and sharing between the US and China in the future or if the two nations will grow further and further apart.
- Equities: US equities finished the first quarter up 6.4%. Large cap securities returned 5.9% while small cap securities were up 12.7% continuing their market leadership. In the US, large cap value outperformed large cap growth by 10.3% during the quarter while small cap value outperformed small cap growth by 16.3%. Developed ex-US markets were up 4.1% while emerging markets gained 3.1%.
- Fixed Income: Bond yields rose as the economy improved. As yields rise, prices decline: The Bloomberg Barclay’s Aggregate Bond Index fell 3.4% during the quarter while corporate bonds declined slightly more. We believe fixed income performance will remain challenged due to inflationary pressures and a rising interest rate environment. Low or even negative real yields can persist for a long time.
- Tactical Asset Allocation: Our team continues to favor stocks relative to bonds. Early in the year, we lowered our overweight to US equity in our strategic asset allocation as we sought to increase cyclical exposure that exists in overseas equity markets. In addition, we introduced an allocation to a diversified portfolio of real assets and continue to emphasize investment-grade, credit-oriented sectors and alternative strategies for appropriate investors.