May 08, 2021
Monthly Market Summary – April 2021
April saw a reversal of various trends from earlier in the year. Bond yields retreated, the U.S. dollar weakened, and equity market leadership rotated back to quality consumer discretionary and information technology stocks from “reopening” stocks and back to large-capitalization (cap) stocks from small-cap stocks for most of the month. However, the trend of equity and commodity prices marching higher continued. For example, the S&P 500, Nasdaq, and other major U.S. equity indices reached new highs during April and the FTSE 100 in the United Kingdom (U.K.) hit a 14-month high. Copper and lumber prices also set all-time highs. A strong start to the first quarter earnings reporting season, robust economic data, stimulus payments, the Federal Reserve’s continued accommodative policy comments, increasing COVID vaccination rates, and lifting of pandemic restrictions all contributed to the improving outlook for economies and corporate profits which spurred the gains in financial markets.
The reopening and recovery in many economies showed up in much of the economic data that was released during April especially in the U.S. In the U.S., retail sales were up 9.8% over the previous month with gains across all sectors. The first quarter real gross domestic product (GDP) growth was 6.4% annualized on a quarter over quarter basis. Sectors such as air transportation, accommodations, and food service had strong gains in that report indicating an increasing return to “normal” activity. Job openings increased to the highest level in two years with many companies across industries reporting difficulty finding people to hire. In addition, new unemployment claims hit the lowest levels since before the pandemic at 553,000 for the week of April 24. The Institute for Supply Management purchasing managers’ index (PMI) of manufacturing activity was 64.7, well above expectations, with increases in orders, production, employment, and input prices. The services PMI increased to 63.7. (A number above 50 indicates expansion while a number below 50 indicates contraction.) In Europe, the economic data was a bit more mixed. On a positive note, the eurozone composite PMI moved into expansion territory with a reading of 53.2. However, first quarter GDP for the euro area contracted compared to the prior quarter, hurt by the spike in COVID cases and the related restrictions put in place across the region.
Market participants also took notice that the April inflation reports showed significant increases. The U.S. consumer price index (CPI) rose 2.6% on a year-over-year basis, which was the largest increase in two years. The producer price index (PPI) rose 4.2% over the prior year, the largest increase in ten years. Various factors contributed to the increase in inflation data, including higher gas prices, supply constraints at a time of pent-up demand and excess liquidity, and a lower base for year ago comparisons. Other countries including China and Mexico saw similar increases in inflation rates. A debate about whether the higher inflation rates are temporary or longer-term is heating up concerns that interest rates may need to increase to keep economies from overheating. Some countries, such as Canada, are beginning to consider when and how to pullback some of the pandemic stimulus policies.
U.S. equity markets had a solid performance in April with widespread positive returns. As mentioned above, in a reversal of the first quarter, larger company stocks outperformed small company stocks and growth stocks outperformed value. In another reversal, the energy sector was the poorest performing sector in the S&P 500 and Russell 2000 indices and had the second lowest return in the Russell MidCap index after being the performance leader with double-digit gains in the first quarter. Other than that, sector returns varied by market cap. The top performing sector in the S&P 500 was real estate while financials had the best return in the Russell MidCap and consumer discretionary was the performance leader in the Russell 2000.
The return for the MSCI EAFE index of developed international equities trailed the S&P 500 index return but outperformed the MSCI Emerging Markets (EM) index on a U.S. dollar basis. Dollar returns were higher than local currency returns for both the EAFE and EM indices as the dollar weakened relative to major currencies since bond yields declined. Just as in the U.S., growth stocks outperformed value stocks in both the EAFE and EM indices. The energy sector was the weakest performing sector in foreign markets. Materials and healthcare were the top performing sectors in the EM index while information technology and real estate were among the best performing sectors in developed markets. On a geographical basis, among international developed markets, the euro region was the top performer as COVID impacts eased somewhat. Japan was the performance laggard as COVID cases spiked. Among emerging markets, Poland had the highest return as economic activity improved. Taiwan continued to be a top performer benefiting from strong export demand. Brazil rebounded after sharp declines in prior months due to political issues. Other Latin American countries with their own political issues took over as the performance laggards including Chile and Peru.
After three consecutive months of negative returns, U.S. bond market sector returns were positive in April since longer-term interest rates declined. The drop in bond yields was a bit unexpected especially with the robust economic data and higher inflation data. Strong demand from foreign investors was likely a factor in pushing bond prices higher. The 10-year Treasury bond yield declined after reaching a 14-month high of 1.77% during March and ended April at 1.65%. All sectors of the bond market posted positive returns with longer maturity bonds posting the highest returns. The corporate high yield index also had one of the best sector returns reflecting the improving economic outlook. The municipal bond sector experienced strong demand from investors which provided a boost to prices in that sector.
The Bloomberg Commodity index generated a strong positive return for April as prices in almost all sectors climbed, many to all-time highs. The livestock sub-index was the only sub-index we track that posted a negative return for the month. In comparison, the grains index with a return of 16% had the highest return among the sectors we track reflecting strong demand from China. The industrial metals sub-index was up almost 9% on strong demand from manufacturing and construction buyers. The price of copper hit an 11-year high and palladium hit an all-time high. The precious metals sub-index also was up with a gain for both gold and silver. The price of West Texas Intermediate (WTI) crude oil ended the month higher at about $63 per barrel up from just under $60 at the end of March on the strong demand outlook and tighter U.S. inventories. The price of oil bounced around during the month as news of the increasing number of COVID cases in a number of countries dimmed the outlook for demand growth and OPEC+ decided to gradually increase supply.
Vogel Consulting, LLC (Vogel) Tactical Recommendations
We have a neutral view on growth relative to value preferring to have exposure to sectors benefiting from secular growth trends along with some exposure to cyclicality to participate as the economy improves. We favor equites over bonds with yields still at historic lows. Within the equity allocation, we recommend an equal weight position relative to long-term targets to U.S. large-cap, mid-cap, and small-cap stocks, as well as to developed international market equities. We recommend an overweight in emerging markets equities due to expectations for higher economic growth rates than in developed countries and for the potential for a boost to returns from a declining U.S. dollar. Within our fixed income recommendation, we continue to favor short to intermediate maturities. We continue to recommend an underweight allocation to hedge funds. We recommend keeping at least a year of cash reserves as we expect bouts of market volatility throughout the year.
The statistical information contained in this commentary has been compiled from publicly available sources and is presented to you for your review and for discussion purposes only. The information contained in this commentary represents the opinion of the author(s) as of its date and is subject to change at any time due to market or economic conditions. These comments do not constitute a recommendation to purchase, sell or hold any security, and should not be construed as investment advice or to predict future performance. Past performance does not guarantee future results.
The statistical information contained in this commentary was derived from sources that Vogel Consulting, LLC believes are reliable, and such information has not been independently verified by Vogel. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of the Russell Investment Group. An index is not managed and is unavailable for direct investment.