as of March 31, 2021
Equities maintained their upward momentum during the quarter, as the improving pace of vaccinations in developed economies drove optimism that restrictions on activities will continue to be gradually lifted as the year progresses. This is likely to unleash a wave of pent up demand given the elevated household savings rate during the pandemic. This contributed to a shift in sentiment away from the technology heavy “stay-at-home” stocks that had outperformed during the early recovery toward more cyclical sectors that should benefit from re-openings. Similarly, optimism on reopening (combined with policy support) led to an increase in rates.
In the US, Congress passed its third pandemic-related fiscal passage ($1.9T), and discussion has begun on an additional infrastructure related fiscal package. The Federal Reserve kept short-term borrowing rates near zero and remains committed to maintaining its bond buying program until the economy reaches full employment. While the Fed’s dot plot continues to suggest no rate increases through 2023, a few committee members have increased their 2022 and 2023 projections.
Global equities continued to move higher in Q1, with the MSCI ACWI index, a measure of the global stock market, gaining 4.6% for the quarter and 54.6% over the past 1-year. The S&P 500 returned 6.2% during the quarter, outpacing most other regions. Over the past 1-year, the S&P 500 has returned 56.4%. International developed stocks rose 3.5% in Q1 and 44.6% for the past year. Emerging market equities rose 2.3% in Q1 and 58.4% over the past 1-year. Within emerging markets, Asian markets produced the best results over the past year, returning 60.1%.
Within fixed income, the Bloomberg Barclays Aggregate index declined 3.4% during Q1, with Treasuries slightly outperforming corporate bonds due to the Aggregate’s shorter duration. The yield curve steepened during the quarter, with 3-month yields declining 8 basis points, while 10- and 30-year yields rose by 81 basis points and 76 basis points, respectively. Investment-grade corporate bond spreads fell an average of 5 basis points during the quarter to 0.9%, which is roughly 20 basis points below the long-term median level. High yield bonds gained 0.8% during the quarter, as credit spreads fell by 50 bps to 3.1%, roughly 1.5 percentage points below the long-term median level of 4.7%.
The faster than expected progress in vaccinations reinforces our confidence in a rebound later this year. While there remains the potential for vaccine rollout issues or more problematic virus variants, our expectation is that the US and potentially other developed economies will return to pre-pandemic levels of economic output this year. This should provide a catalyst for strong earnings growth over the near-term. Inflation is likely to move higher this year, particularly as year-over-year figures are compared to depressed levels from the middle of 2020. However, it remains to be seen whether this increase will be transitory or if the shift in fiscal policy will drive sustained higher inflation.
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