Q1 2021 Market Recovery
Portfolio results for the first quarter of 2021 benefited from moderate-to-strong gains from global stock markets. Like the prior quarter, the
S&P 500 and technology stocks lagged smaller cap and value stocks as post-COVID-19 favorable recovery expectations have been justified
by major post-December U.S. declines in Coronavirus infection rates. New virus variants and a recent surge in infections in parts of the
U.S. and some countries are still a concern, but the increasing rate of vaccinations is expected to counteract these risks in the not-too-distant
future.
U.S. large-cap stocks (S&P 500) returned 6.2% for the quarter. Small-cap U.S. stocks (Russell 2000) did well with a gain of 12.7%, and
even smaller micro-cap stocks did better at 23.9%. Foreign developed stock markets (EAFE) had a modest 3.5% gain for the quarter (and
7.6% for currency-hedged EAFE). Emerging markets stocks returned 2.3% last quarter.
Value stocks (e.g., energy, financials, consumer discretionary) continued to outperform growth and tech stocks. The S&P 1500 Value index
had an 11.6% quarterly return versus 2.7% for the S&P 1500 Growth index. Higher interest rates, valuation differentials and post-COVID
earnings rebound expectations were all factors in the outperformance of value stocks. This trend could remain in place for much, if not all,
of 2021.
Long-term Treasury bonds (Bloomberg/Barclays 20+ Yrs) lost 13.9% over the quarter as interest rates rose significantly. High-yield bonds
made 0.9% over the quarter, as improvements in credit conditions largely offset the rise in interest rates. T-Bills (Bloomberg 1-3 month)
continued to provide no appreciable return due to Federal Reserve short-term interest rate policy.
Corporate earnings growth is expected to remain high this year as pre-COVID behavior resumes and the effects of the recently passed $1.9
trillion COVID stimulus package works their way into the economy. Part of this stimulus, as well as monetary stimulus, should continue to
find its way into global stock markets, real estate and credit-sensitive bonds, creating a favorable investment environment for these assets for
many months and perhaps years.
The prospect of higher U.S. corporate income taxes has had little effect on U.S. stock prices thus far. Part of this is due to the robust
economic recovery and strong stimulus measures. Also, it is likely that parts of the proposed tax increases will not happen or be watered
down. Nevertheless, the risk of higher corporate taxes is one of several factors that suggest diversifying non-U.S. assets.
As always, please feel free to contact your WESCAP advisor if you would like to discuss any of this further.