Although the first quarter began with the highest levels of COVID-19 cases, hospitalizations and fatalities that we had seen during the pandemic, it ended with optimism that life might soon return to normal with ambitious vaccine distribution and the re-opening of many state’s activities that have suffered during the pandemic.
For another quarter, regardless of pandemic uncertainty, most major asset classes continued to see positive performance and produce gains. Market indexes made new highs throughout the quarter. The performance of high-quality credits reminded us that inflation concerns are broad in the market and the inordinate appetite for risk continues to grow as investors seek gains in an environment where asset valuations continued to be higher than we’ve ever seen.
This environment is undoubtedly a product of recent fiscal policy where government stimulus and relief packages fueled the first quarter with $900 billion of cash payments and relief from the end of 2020 and an additional $1.9 trillion relief package passed in March that provided a boost intended for struggling families and businesses shuttered during the pandemic. Monetary policy continued to be very accommodating as the Fed voted to continue the current pace of bond buying that continues to add liquidity to the markets and bolster prices.
The S&P 500 added 6.2% in the first quarter, 10-year US Treasury yields increased from 0.93% to 1.74% confirming our belief that government bonds have very little room left for returns when looking at historical averages (watch a video about our strategy to position for this here https://bit.ly/2S9twIe). The Barclays US Aggregate Bond Index was down 1.6% for the quarter, after making all-time highs in 2020. Gold continued to retreat being down more that 10% for the quarter, seeing levels that we saw a year ago before its historic run.
One of the most significant changes to the markets in the first quarter was the rotation from Growth stocks to Value stocks. Large, tech led growth stocks fueled last summer’s performance of the S&P 500 (“Something is wrong with the S&P 500 Index…”https://bit.ly/2InwJPX) but the first quarter’s best performers were Energy (+32%), Financials (+17) and Industrials (+11%) which are all conventional value sectors. The Russell 1000 Value fund outperformed the Russell 1000 Growth fund by slightly more than 10% during the quarter.
Looking ahead to how we position our portfolios for the future, we remain concerned about the high levels of risk investor are willing to take to earn returns. It was just a couple of months ago that investors were enthralled with the stories of the “GameStop short squeeze” that continue to play out in not only GameStop but several other social-investing driven companies and with their broader counterparties like RobinHood. We wrote extensively about this event in this Investing Insight back in February (https://apple.co/36TsmFx). The somewhat inexplicable buying of Bitcoin to a high of over $63,000 during the quarter seems indicative of another frenzied attempt to chase returns without regard to the enormous risk and volatility associated with this new “asset class”. The recent sell-off and volatility cemented that opinion for us. Investors piling into SPACs with limited transparency about holdings and an inability to truly assess risk of the assets is a concerning signal as well (more about this to come in one of our next Investing Insights).
While many economic indicators are improving, Small Business Sentiment is still low in terms of sales expectations and being able to fill jobs. Inflation Sentiment is beginning to rise to levels we have not seen in nearly 10 years. In more established asset classes, the traditional safe havens of US Government bonds and precious metals have underperformed riskier asset classes as investors look for yield. How do we prepare for this group of conditions that has come together in the markets? Our approach to portfolio construction has always been a keen eye on risk management through diversification and tactical allocations. As stock valuations continue to be near all-time highs, yields on government bonds remain well below historical averages and investors continue to seek riskier assets to provide yield, intelligent diversification continues to be the best strategy to maximize performance in the long run. We will continue to rebalance to proven strategies and tactical allocations to minimize risk in your portfolio. This is a proven strategy to maximize gains in these conditions and still be positioned for the long term.
