April 15, 2021
Monthly Market Summary – March 2021
Volatility picked-up as various crosscurrents impacted financial markets during March. For example, major U.S. equity indices hit record highs during the month driven higher by optimism fueled by the vaccine rollout and passage of the $1.9 trillion stimulus bill that included direct payments to citizens. However, indices experienced days of sharp declines as well. For example, the Russell 2000 index of small-capitalization (cap) stocks declined almost 10% in just seven days after reaching a new all-time high on March 15. The optimism for economic growth sparked inflation concerns and drove bond yields higher (and prices lower) with the 10-year U.S. Treasury bond yield reaching a 14-month high of 1.77%. That increase in yields hurt high growth, momentum stocks such as the technology companies in the Nasdaq Composite index by increasing the discount on future earnings, leading that index to decline over 4% early in the month. The index recovered as yields retreated later in the month. The expectations for better economic growth led investors to rotate into stocks that will benefit from a pick-up in economic activity thereby pushing up prices for “value stocks” and sapping demand, and driving prices lower, for technology stocks. International stocks, particularly in Europe, were hurt by new and extended COVID related lockdowns as new cases surged in several countries. In China, a major equity index sold-off on concerns that the government is beginning to tighten monetary and fiscal policy since the pandemic impact is receding.
In the U.S. equity market, the S&P 500, Russell MidCap, and Russell 2000 indices each posted a positive return for the month. In contrast to the prior two months of the first quarter, small-cap stocks underperformed larger-cap stocks. The performance gap between the small-cap and large-cap indices for the first quarter is still wide with the Russell 2000 posting a return of over 12% compared to the about 6% return for the S&P 500. Value stock indices outperformed growth stock indices by a wide margin again in March widening the performance gap for the first quarter. The gap between returns for the Russell 2000 Value index and the Russell 2000 Growth index is particularly noteworthy with returns of 21.2% and 4.9% respectively. Reflecting the cross currents moving asset prices during the month, defensive sectors such as utilities as well as certain economically sensitive sectors such as industrials and materials had the best returns. Information technology, healthcare, and energy lagged.
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 lower than local currency returns for both the EAFE and EM indices as the dollar strengthened relative to major currencies since bond yields rose. Just as in the U.S., value stocks outperformed growth stocks in both the EAFE and EM indices. Sector returns were similar to results in the U.S. On a geographical basis, among international developed markets, the euro region outperformed the Pacific and Far East regions. Among emerging markets, commodity heavy economies, such as Russia, Chile, and Mexico had the best returns. Turkey was the laggard among emerging markets countries since stocks there fell sharply after President Erdogan replaced the central bank governor with one that favors unorthodox economic policy and a key interest rate was raised to 19% from 17%. China also had a negative return in part reflecting concerns about policy tightening, signs of a slowing in the economic recovery, and increasing regulatory scrutiny of large technology and internet companies. The Shanghai Stock Exchange Composite index (SSEC) fell into correction territory early in March as the index dropped 10% from its February 19, 2021 high. The index recovered some of the decline by the end of March after the central bank said it is not planning to tighten monetary policy.
For the third consecutive month, U.S. bond market sector returns were mostly negative in March since longer-term interest rates rose on increasing concerns about a pick-up in inflation as the economy heats up. As mentioned above, the 10-year Treasury bond yield hit a 14-month high of 1.77% during March. As a reminder, the yield was 0.9% at year-end 2020. Only the shortest maturity Treasury bond index, the corporate high yield bond index, and the municipal bond index posted small positive returns for the month. The municipal bond index had the best return, which was 0.6%. Long-term bonds had the lowest returns. The start of 2021 has been a difficult period for bond market returns with the Bloomberg Barclays U.S. Aggregate Bond index posting a return of-3.4% for the first quarter. Returns for longer-term bonds reached double-digit negative territory.
Most commodity markets cooled during March after various segments reached multi-year highs earlier in the first quarter. Lower demand from China was a contributing factor. The Bloomberg Commodity index generated a return of -2.2% for March. The livestock sub-index had the best return among the sub-indices we track with a gain of 5%. Each of the other sub-indices we track posted a negative return. The industrial metals and petroleum sub-indices each declined about 2.4% for the month. The price of West Texas Intermediate (WTI) crude oil rose to as high as $66.02 per barrel in mid-month, the highest price since November 2019, reflecting lower production. However, WTI then declined to as low as $57.75 on short-term demand concerns related to slowing demand from China and new COVID related lockdowns in Europe. WTI managed to recover modestly to end the month at just under $60. The precious metals index also finished with a negative return as gold and silver prices declined as interest rates moved higher. Silver was one of the poorest performing commodities for the month declining about 10%.
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.