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Investment Commentary & Outlook Q1 2021

Written by Canty Financial - Published on April 20, 2021

After a rocky start in 2020 with the markets hitting their low point in March due largely to the economic disruption of the pandemic, 2020 ended with solid returns in many major stock indexes. The S&P 500 ended the year up 18.4% for the year, the Dow Jones Industrial Average gained 7.3% for the year and the tech heavy NASDAQ gained 43.6% for the year. 

The markets continued their strength into the first quarter of 2021. Both the S&P 500 and the Dow finished the quarter at record levels. Corporate earnings for the companies comprising the S&P 500 are expected to show growth of about 23% when all of the first quarter earnings are in.  

Based on these major indices, the equity markets continued their momentum from the last half of 2020 into the first quarter of 2021. But within that overall strength there were some changes in the markets during Q1 of 2021. 

Sector Rotation 

During 2020 technology and stay at home stocks were the market leaders. Growth dominated. The market leadership changed about in Q1 of 2021. 

Energy, which had lagged greatly in 2020 rebounded from its full year decline to post a gain in excess of 30% for the quarter. Value outpaced growth in the quarter, reversing what we saw during 2020. Additionally, small and mid-cap stocks did well in the first quarter as well. 

On the market sector side, we saw a rotation away from technology, consumer discretionary and communications which were the top three market sectors in 2020. Leadership rotated to energy, financials and industrial stocks as the top three sectors during the first quarter. 

Technology 

Many technology stocks surged in 2020. Among these were Apple up over 81% in 2020, Amazon up over 76% and Microsoft up over 42%. The Invesco QQQ Trust ETF, which attempts to replicate the performance of the tech heavy NASDAQ 100 index, was up almost 49% in 2020. This all makes sense as these and other tech stocks were major contributors to the stay at home economy that surged in the wake of the pandemic. The technology sector was up just under 44% for the year in 2020, the first quarter of 2021 saw a gain of just 2%. 

This could be indicative of investors taking a pause on tech stocks in light of the gains in 2020 or it could be the start of a longer term shift. Only time will tell. 

Certainly many technology stocks were the beneficiaries of changes in the way people worked, shopped and learned in 2020. The future prospects of many stocks in this sector will depend on the extent to which some of these trends become a permanent shift in our lifestyles. 

Interest Rates 

The quarter saw a significant steepening of the Treasury yield curve over where it had been at the end of 2020. The yield on the 10-year Treasury rose over 100 basis points during the quarter. This impacted the returns on bonds during the quarter. According to Morningstar:

  • Their broad index of core bonds lost 3.39% for the quarter.
  • U.S. Government bonds lost 4.34%.
  • Corporates lost 4.69%.
  • Their index of long-term core bonds dropped 11.08% for the quarter. 

High yield bonds, which are less impacted by interest rates, were up slightly.  

The Fed has kept interest rates low and recently indicated that they do not foresee raising rates any time in the near future. They do see expanded economic growth and the potential for higher inflation on the horizon. 

Rates on mortgages remained at historically low levels during the quarter which has continued to fuel a housing boom in many areas of the country. With an undersupply of new homes, continued high demand and low mortgage rates should continue to fuel strength in home sales.

Vaccines and Stimulus 

Over recent months the United States has ramped up the manufacturing and distribution of Covid-19 vaccines during the quarter. The percentage of Americans having received at least one dose jumped during the quarter. The Center for Disease Control (CDC) had pledged to have vaccines available for all Americans who wanted one by May, and has recently moved that up to later this month. 

While cases of the virus have surged again late in the quarter and into April, the widespread vaccination of Americans and others around the world bodes well for restarting the economy. Companies in the travel and leisure industry, the restaurant sector and other areas that were hit hard by the pandemic stand to benefit as the economy reopens. 

Additionally, Congress passed a $1.9 trillion stimulus package during the quarter. This resulted in millions of Americans receiving a third stimulus check which will help fuel economic growth to an extent. The upcoming infrastructure plan will be voted on by Congress in the coming weeks and could add further fuel to the economy.   

The infrastructure plan could fuel growth in jobs and spending, both positives for the economy and the markets. 

Outlook For 2021 and Beyond 

Many of the market forecasts for 2021 are predicated on how well the U.S. and the rest of the world deal with the pandemic. To the extent the economy reopens, this could help any number of companies who deal with consumers in person. 

Several major investment firms predict that international stocks will outperform their U.S. counterparts in the coming years. This may be in part due to the substantial outperformance of the U.S. market in recent years, as well expectations of growth in a number of foreign markets both in developed and emerging markets. There is a sense that there are many undervalued cyclical stocks outside of the U.S. that will participate in the shift from growth names to more cyclical value-oriented names. 

In a recent update to the House Committee on Financial Services, Fed Chairman Powell indicated that the Fed remains committed to supporting the economy and the recovery. He indicated that he needs to see a substantial economic recovery before the Fed would consider any changes in their policies. The Fed Chairman did not indicate any concern about the rather sharp increase in long-term interest rates during the quarter, indicating that this was part of an orderly process. 

Here at Canty Financial Management, we are encouraged by the strength of the stock market and the progress of the economy. That said there are always uncertainties in the economy and the outlook for investors. We will continue to advise our clients on their long-term goals and not focus on short-term disruptions. 

With that, however, we realize that there will be changes in the economy and the markets born out of or accelerated by the pandemic. We will continue to keep our eyes on these changes and adjust our client’s strategies when appropriate. 

Please call us at 518-885-3230 or 239-435-0090 to let us know if you have questions.  We welcome clients who are interested in financial planning, opening investment accounts, or adding to existing investment accounts.

Bill Canty, CFP®, CPA

Joe Canty, Investment Advisor

Maureen Walsh, EA, Investment Advisor

Tina Alteri, CPA, Tax Advisor

Ed Canty, CFP®, Investment Advisor

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