1st Quarter 2021 Market Commentary: Tempests in Teapots

Data Source: Bloomberg

To read full commentary, click here.

March 2021 Highlights:

  • Led by the U.S., global equity markets continued their advance throughout most of March as the MSCI All-Country World Index (ACWI) returned 2.7% for the month. Across major regions, the S&P 500 returned 4.4% followed by MSCI Europe (+3.3%). Pan-Asian markets underperformed in March with MSCI Japan returning 1.1% while Emerging Markets and Asia ex Japan and were down for the month, returning -1.5% and -2.1%, respectively.
  • As has been the pattern for the last several months, March’s equity market performance was a tale of two halves where the 2nd half of the month saw a sharp reversal from the 1st half even though equity markets ended positive for the month. COVID continues to drive day-to-day volatility where investor sentiment seems to be driven by vaccination progress (or lack thereof).
  • The intramonth reversal was most prominent with U.S. small versus large cap. Around mid-month U.S. small caps (S&P 600) were up almost 10% before nosediving to negative territory but ending the month positive 3.3%.  In contrast, U.S. large caps (S&P 500) followed a steady upward move throughout the month, returning 4.4%.  S&P Pure Value (+6.8%) handily outperformed Pure Growth (-0.2%) although this gap narrowed during the 2nd half of the month.
  • After lagging throughout much of the 1st quarter, defensive sectors such as Utilities, Consumer Staples, and Real Estate were among the top performing sectors alongside traditional cyclicals such as Industrials and Materials (despite negative commodity returns) while traditional growth sectors (Technology, Healthcare, Consumer, Communication Services) lagged along with Energy. However, all sectors generated positive returns in March.
  • The strong performance of Utilities helped propel the High Dividend Factor as the top performing factor in March alongside Value and High Quality while Momentum underperformed after having led throughout most of the month. Value and High Quality outperformed High Dividend and Min Vol, both likely hurt by higher interest rates.
  • As interest rates rose to a post-pandemic high, investment grade fixed income posted another monthly loss despite corporate and mortgage-backed spreads holding steady. The Bloomberg/Barclays US Aggregate Bond Index dropped 1.2% mainly due to a rise in interest rates.
  • S. high yield continued to enjoy moderate gains as high yield spreads remain below 3% and are near multi-decade lows. The Bloomberg/Barclays US High Yield Index returned 0.1% as tighter credit spreads helped offset the effects of higher interest rates. Foreign currency and emerging market debt underperformed due to a combination of higher interest rates and a stronger U.S. dollar.
  • Within equity alternatives, Commodities took a breather following strong performance through February, dropping 2.2%, while Precious Metals (primarily gold) dropped 1.7% as the safe-haven demand for gold diminishes in the face of pandemic recovery. The Dow Jones REIT Index outperformed the broader U.S. market, returning 5.5% as higher yield equities performed well in March.
  • The markets expect the good times to roll with vaccination rollouts and strong economic growth while they are less concerned about inflationary pressures and potential market disruptions induced by easy financial conditions, whether YOLO Robinhood retail traders or leveraged family offices.

To read full commentary, click here.

By: Benjamin Lavine