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.
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.
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.
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.
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 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.
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:
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