Markets weathered an eventful first quarter that began with the storming of the US Capitol, a change in Whitehouse leadership, a literal freeze-up as far south as Houston, the rise and fall of GameStop, and ended with the blow-up of heavily margined hedge fund, Archegos. Even so, the positive shift in national tone post-election in parallel with the worldwide vaccination rollout was equally dramatic. Financial markets picked up on the good vibrations, forecasting an accelerated economic restart aided by major additional COVID relief stimulus to the tune of $1.9 trillion plus a multi-year infrastructure bill here in the US, further stimulus overseas in the EU (€1.8 trillion), and rising corporate earnings forecasts.

Indeed, a small panic over inflation fears occurred, matching the strongest economic rebound since the early 1980s with the worst quarterly fixed income performance since that same era (Barron’s, “The Treasury Market Just Had Its Worst Quarter Since 1980,” 4/1/21). However, interest rates have only really re-normalized to pre-pandemic levels, and the Federal Reserve has stated a belief that any inflation will be transitory as supply chains rebuild capacity, as well as reiterated its commitment to low rates for the foreseeable future. The rapid rise in rates also challenged high price-to-earnings growth stocks, which felt the sting of a corresponding rise in equity discount rates. In the end, all this nevertheless translated to another positive, if not uneven performance among the major equity indices, ultimately posting all-time highs while bonds recorded a negative start to the year.

For the quarter, the S&P 500 index rose +6.3% (ETF proxy SPY*), while the Barclays Aggregate Bond Index fell by -3.4% (AGG). In contrast among equities, the small-cap Russell 2000 ran up +12.9% (IWM), the technology-focused Nasdaq 100 finished just +1.8% higher (QQQ), while value and growth-focused issues came in at +10.9% (IVE) versus +2.2% (IVW), respectively, demonstrating the significant dispersion among the major equity factors.

That leaves our largest concern for the moment – simply that we’d be hard-pressed to find a professional that isn’t onboard with this optimistic outlook. And when all market participants get on the same side of a trade with stocks and bonds both as expensive as they are, it can end poorly. That said, for now the outlook is bright and we will continue to monitor markets regularly and adjust portfolios accordingly to help our clients reach their goals while sleeping well at night.

* Not Individual Investment Advice; Dividend-adjusted proxy ETP data from Commodity Systems, Inc. & Allocations as of March 31, 2021 may not apply to all clients; ECA assumes no duty to update any information in this presentation for subsequent changes of any kind.