Equities continued their winning streak in the first quarter of 2021 despite political unrest, weather severe enough to disrupt economic output and a global pandemic that continued to rage. Helping to underpin the positive momentum for stocks was an earnings season better than anticipated given these challenges. The rapidly increasing vaccination efforts in the US allowed for a continued reopening of the economy at the same time a massive stimulus bill was passed that pushed out hundreds of billions of dollars in just a few short weeks. A dramatic reaction to all of this in the fixed income market – doubling the yield of the 10-year Treasury – caused stocks to wobble but ultimately was not enough to halt the move higher. Value stocks again trounced growth, though the final weeks of March did see growth stocks catch a bid higher. Small and midcap stocks also performed much better than their largecap peers in the quarter. A strengthening dollar and a new wave of Covid infections abroad made for tough relative performance for international stocks as the quarter came to a close.
At the beginning of the year, the United States was enjoying the longest expansion on record. The economy seemed poised to continue its run with the signing of trade deals with Mexico, Canada and China. Donald Trump held comfortable leads in most polls and markets were breaking to new highs. By the end of the first quarter the Covid-19 virus had plunged the US economy into recession and ushered in the fastest bear market with the S&P 500 ultimately declining 34%. Unprecedented monetary and fiscal response saw 5 different relief packages, the largest non-war stimulus in US history, the Fed balance sheet expanding by 70% in just 2 months, record low interest rates and the fastest recovery from a bear market ever. In the final quarter of the year alone we saw the introduction of two vaccines for Covid-19, developed in one tenth of the normal time, a new President elected and a surprise election outcome in Georgia, leaving the Federal government entirely in Democrats’ control, though by the slimmest of margins. The fourth quarter also witnessed a changing of the guard in stock leadership with international, especially emerging markets, value and small cap the stars. There have been many false starts when it comes to leadership change in the past 12 years, but this has the potential to last longer.