1st Quarter Market Commentary
by Steve Conard, CFP®
Global financial markets experienced a choppy first quarter of 2021. While the ride was anything but smooth, major US equity indices all finished solidly in the black, led by the Dow Jones Industrial Average (DJIA – up 7.76%) and S&P 500 (up 5.77%). Notably, ‘Big Tech’ company shares have become market laggards after pulling the markets ever-higher over the past five years, as the tech-heavy NASDAQ Composite Index posted a smaller gain of 2.78%. The first quarter champion is the Russell 2000 Index of small company stocks, which shot up 12.44%.
The fast-growing but pricey technology sector has fallen victim to the rapid rise in US Treasury bond yields since the fixed income markets began selling off in late January. The yield on 10-year US Treasury bonds climbed from 0.917% to close the quarter at 1.746% as the Bloomberg Barclays Aggregate Bond Index fell by 3.39% in the first quarter. Bond investors see inflation on the horizon courtesy of the lifting of pandemic lockdowns plus a fresh $1.9 trillion stimulus package. Bond traders are also wary of the rather relaxed policy stance the Federal Reserve has taken with regard to inflation. Currency markets have also taken notice, as the US dollar reversed course and began to strengthen against major foreign currencies.
These shifts have impacted global stock markets significantly. Rising interest rates have triggered profit taking in the technology sector, and traders finally began to buy into beaten down sectors of the US economy. Small cap stocks are the new market leaders, and value stocks have outperformed growth stocks by a wide margin for the first time since early 2016. Rising rates and the coincident strengthening of the US dollar have also cooled down overseas equity markets just as they appeared set to outpace US markets after a prolonged period of relative underperformance. The MSCI EAFE Index of developed international equity markets (up 2.83%) and the MSCI Emerging Markets Index (up 1.95%) ended March well off their intra-quarter highs set in mid-February.
The long-awaited rotation within the US equity markets presents opportunities for investors to benefit from a more diversified portfolio after a long period of domination by giant growth stocks. The sheer size of the technology sector giants has generated volatility in the major indexes as their shares have traded back and forth, but markets have trended higher because money is finding its way to other pockets of the market rather than moving to the sidelines. We expect this to continue provided there are no major reversals in COVID-19 trends as 2021 continues to unfold.
*Data sourced from MarketWatch. Compass Financial Services (“Compass”) is a registered investment adviser with its principal place of business in the State of Iowa. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.