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Economic Update — Reviewing Q1 2021

A big green flag was waved for the bull market in the first quarter of 2021, as investors continued to load up their plates with risky assets.

With a presidential election behind us and ever-growing coronavirus vaccination rates ahead, US markets got back off to the races. The NASDAQ gained 3% in Q1, but a marketwide sector rotation drove the Dow and S&P 500 up 8.9% and 6.2%, respectively.

Though volatility might seem low now, keeping tabs on the latest market trends and economic data is crucial to successfully managing an investment portfolio and educating clients.

Below are a few takeaways from the YCharts Q1 2021 Economic Update. The deck, published quarterly, arms advisors and investors with the insights they need to digest the previous quarter, and make smarter investment decisions going forward. Furthermore, the deck is built in presentation format, so you can easily leverage it in client communications.

YCharts users can find the full deck in the Support Center. Not a current client? Reach out to get access.

 

Asset Class Performance

Every asset class in the table below posted positive gains in Q1, with the exception of fixed income — Municipal Bonds, Aggregate Bonds, and US Treasuries. The notable laggard was US Growth, adding just 0.9% in the first quarter after turning in a 62.7% 1-year total return.

Q1 2021 Asset Class Performance

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Commodities and US Value led the way at 13.6% and 11.3%, respectively. The moves come as investors rotated out of growth and into value, catalyzed by a flight to beaten-down “reopening” stocks. Also lifting the market in Q1 were US Small Caps, up 12.7%.

 

Early Reactions to Rising Rates

The housing market has gone through the roof over the past year.

But recent existing home sales data shows a 10.7% drop from its three-year high. This is potentially due to higher mortgage rates but also because of continued low supply in the housing market, and some seasonality. Furthermore, early reactions in certain regional markets indicate there may be deeper concerns about rising rates and inflationary conditions.

US Existing Home Sales, 15 Year Mortgage Rate, and 30 Year Mortgage Rate from April 19th, 2018 through March 31st, 2021

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Moving from mortgage to treasury rates, the following chart shows preference of shorter maturities over long term bond funds in Q1. This may be an investor reaction to the decline in long term bond fund performance, a repositioning for future expectations of more yield curve steepening, or some combination of both.

iShares 20+ Year Treasury Bond ETF and iShares 1-3 Year Treasury Bond ETF Total Return Price changes for Q1 2021

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D.D.D. — Debt Depresses the Dollar

Along with rising interest rates, the relative strength of the US dollar has led to inflationary concerns. The USD somewhat stabilized against other major currencies in the first quarter of 2021, but is still mostly weaker than its levels from a year ago.

USD/EUR, USD/GBP, USD/CAD, USD/JPY exchange rates from March 30th, 2020 through March 31st, 2021

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USD weakness can be partially attributed to abnormally high levels of public spending. US monthly treasury outlays have repeatedly spiked and the US public debt has increased at a faster clip since the pandemic, thereby devaluing the dollar. Though the third round of stimulus payments are yet to be captured in the data, one might reasonably expect outlays, the public debt, and also one-year ahead government debt growth expectations, to remain at elevated levels, keeping the USD suppressed.

10-Year performance of US Monthly Treasury Outlays, US Public Debt, and US One-Year Ahead Government Debt Growth Expectations, from April 30th, 2011 through March 31st, 2021

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Of course, with how jam-packed Q1 was with events, rates and Debt & the USD are just the start. Watch the full presentation highlighting all Q1 economic trends:

YCharts users: download the full deck in the Support Center. Not a current client? Reach out to get access.

 

Connect with YCharts

To get in touch, contact YCharts via email at hello@ycharts.com or by phone at (866) 965-7552

Interested in adding YCharts to your technology stack? Sign up for a 7-Day Free Trial.

 

Disclaimer

©2021 YCharts, Inc. All Rights Reserved. YCharts, Inc. (“YCharts”) is not registered with the U.S. Securities and Exchange Commission (or with the securities regulatory authority or body of any state or any other jurisdiction) as an investment adviser, broker-dealer or in any other capacity, and does not purport to provide investment advice or make investment recommendations. This report has been generated through application of the analytical tools and data provided through ycharts.com and is intended solely to assist you or your investment or other adviser(s) in conducting investment research. You should not construe this report as an offer to buy or sell, as a solicitation of an offer to buy or sell, or as a recommendation to buy, sell, hold or trade, any security or other financial instrument. For further information regarding your use of this report, please go to: ycharts.com/about/disclosure

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