Quarterly Commentary 1Q’21
A Time For Renewal
The first quarter of 2021 brought springtime and with it a distinct air of optimism that the world is turning the corner in fighting coronavirus and overcoming the economic despair of the past year. This sense of renewed positivity is boosted by the US federal government which, beginning on inauguration day on January 20, has delivered bold policy response to the pandemic, with the US government playing a role it has not played in decades to spur economic growth, innovation, recovery, and opportunity. In the past 4 months, Congress passed the American Rescue Act with its $1.9 trillion stimulus and new tools for fighting child poverty, the US rejoined major global initiatives including the Paris Climate Agreement and the World Health Organization, and roughly half of all American adults have received at least one shot of the Covid vaccine. On the economic front, the US added 916,000 jobs in March, the first quarter’s corporate earnings season started off with a bang, and consumer confidence is rebounding, reaching its highest point of the past year. With vaccinations happening at a rapid - if uneven - pace, projections for 2021 economic growth have soared to 6% globally and higher for the U.S. There’s still a high level of uncertainty around a host of political and virus-related issues, but overall there’s a growing sense of economic exuberance.
Against this backdrop, stocks continued their rise, with the global MSCI All Country World Index up 4.7% and the US-based S&P 500 up 6.2% for the 1st quarter of 2021. This quarterly move caps the biggest 12-month rise ever in US stocks, with the S&P 500 up 61% (!) from the depths of the pandemic last March. In this past quarter, outperformance came from smaller capitalization stocks and from value stocks (oil, big banks), which showed strength after a long lag. Conversely, renewable energy stocks pulled back after an exceptionally strong past couple years. We’d expected this short-term change in energy leadership at some point and believe it will be temporary as the transition away from fossil fuels continues. In other sectors, semiconductor stocks were up across the board on the ongoing chip shortage and the industrials sector outperformed on anticipation of increased infrastructure spending.
Where do we go from here? The markets are forward-looking and it may very well be that much of the recovery in earnings is already priced into stocks. Additionally, the dramatic rebound in economic activity is driving the expected fears of inflation. The yield on the 10-Year Treasury bond, which reflects forward-looking inflation expectations and is inversely correlated with bond prices, moved from 0.93% to 1.74% during the quarter. Bond prices move in the opposite direction of interest rates, so the major bond indexes showed declines with the downturn more significant for longer-term maturities. Overall, the Bloomberg Barclays Aggregate Bond Index was -3.4% for the quarter. It’s important to note that even with this somewhat dramatic quarterly move, both interest rates and inflation remain very low in historic terms. In spite of the renewed inflation attention, the Federal Reserve again decided not to raise interest rates at its March meeting. That fits with the consensus among economists and investors – including our team at Figure 8 – that while we may see near-term inflation in the rebounding economy (spikes in building materials and related commodities would be a prime example), we do not at this point see indications of a sustained and significant rise in inflation. Regardless, we’re keep a close eye on inflation as a key risk for the markets.
Happy Earth Day 2021
In keeping with the good news theme, we are finally seeing a real chance of significant US leadership in fighting climate change. The American Jobs Plan, President Biden’s proposed $2.2 trillion infrastructure bill, includes big and important climate actions: a goal of zero carbon emissions from electricity generation by 2035, a largescale commitment to EVs and charging stations, industrial policy focused on decarbonization of heavy emitters including steel, chemical, and cement producers, and a new IRS payout mechanism to boost the usage of key green energy tax credits extensions. By the time you read this, the US will likely have announced its “Nationally Determined Contribution” (or “NDC”) targets which could include an ambitious 50% carbon emissions cut by 2030 (from 2005 levels) and might extend targets to include reductions of methane in addition to carbon dioxide. This scale of climate action would put the country and the world on a much faster track to tackling climate change – and would inspire a more aggressive transition to clean energy across industries and companies. As investors focused on sustainability, we’re ready
