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Key Takeaways, First Quarter 2021
By Ralph Goldsticker, CFA | April 2021
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By the end of 2021’s first quarter, equities and credit spreads had retraced their pandemic sell-offs. However, macro risks and related policy responses continue to dominate the news, a trend we expect to persist in the near term.

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The quarter was good for equity markets while bond markets struggled. Increasing economic strength and vaccine roll-out optimism buoyed stocks, but growing unease over inflation pushed sovereign interest rates higher. The vaccination campaign is progressing better in the US than most other nations. Fiscal and monetary policy measures remain stronger here as well. Global stock markets reflected these divergences.

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Equities

 

Stock markets continued their rally.

  • The broad US stock market gained 6.3%, bringing its 12-month return to a hearty 62.5%.

  • Small caps led, returning 12.7% and 94.8% for the quarter and previous twelve months, respectively. 

  • Value stocks led growth, rising 11.3% versus 0.9% — but not enough to offset growth’s long-run dominance. Growth is ahead 63% versus 56% for the past year, 23% versus 11% annualized for the past 3 years, and 21% versus 12% annualized for the past 5-year period.

  • Developed international and emerging markets gained 3.5% and 2.3%, respectively for the quarter. For the last year, they were up 45% and 58%, respectively.

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Fixed Income

Despite the Fed committing to low rates, a strengthening economy and inflation fears led to a rise in interest rates on longer-maturity Treasuries. 

  • The yield curve steepened. 1-year Treasury yields fell 3 bps, the 5-year yield rose 56 bps, 10-year bond yields increased 81 bps and 20-year yields moved up 86 bps. 10-year rates are up 122 bps from their low, and 20-year rates are higher by 144 bps.

  • Given an improved outlook for economic recovery, credit and liquidity spreads narrowed. Investment grade spreads compressed 6 bps while high yield spreads fell 50 bps. Investment grade and high yield spreads are now 12 and 80 bps narrower respectively than pre-crisis levels