2021 First Quarter Stock Market Commentary

Equity markets advanced in March for a second consecutive monthly gain, capping a strong first quarter of 2021. The S&P 500, a benchmark for large cap US stocks, gained +4.4% on the month for a +6.2% return in Q1. In the trailing twelve-month period since stocks bottomed around the height of the Coronavirus panic, the S&P is up over 56%.

Smaller company stocks continued their recovery by gaining +1.0% in March for a +12.7% gain on the quarter per the Russell 2000 index, which has nearly doubled over the past year. Overseas equities advanced +1.3% this month, with the MSCI ACWI ex-US index posting a +3.5% gain for the quarter.

In fixed income, the Barclays Aggregate Bond index declined for the third straight month, dropping -1.3% in March for a -3.4% return YTD. 10-year Treasury rates resumed their climb, ending the quarter around 1.7% as inflation expectations continue to rise. Gold prices remained in a consolidation pattern, falling -3.0% for the month (-10.4% YTD).

With the new $1.9 trillion stimulus package signed into law and roughly 30% of the US population at least partially vaccinated, increasingly effective COVID-19 prevention measures continue to shift the world toward a return to normalcy. That said, rather than focusing on the headlines, we aim to filter the prevailing narratives through our data-driven “Three Dials” framework. Below is a summary of each of our primary indicators as of the end of the first quarter, all of which were unchanged during the month of March:

1. Market Sentiment and Momentum: Positive

The CBOE Volatility Index, commonly referred to as the VIX and used as a gauge for investor fear, declined to pre-pandemic levels in March. Meanwhile, market breadth continues to improve as leadership shifts from a handful of tech stocks to a more widespread recovery. Technical strength in equities leaves our Momentum and Sentiment Dial firmly in a “Positive” position.

2. Economic Fundamentals: Positive

The US added 916,000 new jobs in March, with key gains in the leisure and hospitality sectors, while manufacturing activity increased for the tenth consecutive month. Consensus expectations for global growth continue to improve, which results in a “Positive” reading for our Fundamental Dial through the end of Q1.

3. Valuation: Negative 

As optimistic earnings projections are priced into equities, stocks with unsustainably high price-to-earnings ratios make up an increasingly large portion of the US market. Overvaluation remains a potential headwind for equity markets, and as such, our Valuation Dial remains in a “Negative” position.

On balance, our Three Dials composite reading takes a “Cautiously Optimistic” view through the end of the first quarter, as strong showings in the areas of Momentum and Economic Fundamentals are balanced by Valuation concerns.

Sources:

https://www.morningstar.com/

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

https://github.com/owid/covid-19-data/blob/master/public/data/vaccinations/us_state_vaccinations.csv

https://www.cboe.com/tradable_products/vix/

https://www.bls.gov/news.release/pdf/empsit.pdf

https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/march/

https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/eye-on-the-market/smalligarchy-nl.pdf