After a loud and eventful 2020, many people were hoping for a quiet start to the New Year. Just when we thought we had seen it all, a 220,000-ton ship, Ever Given, somehow gets “blown by the wind” into the bank of the Suez Canal, blocking the world’s most important waterway for just under a week. This caused significant damage to economies reliant on trade, primarily those in Europe and Asia, but in the time of Covid, what’s another minor disaster? This debacle aside, news this year has primarily been positive, and progress is starting to show. 

There have been plenty of catalysts leading to a much-needed jump-start in the economy. Federal Reserve policy remains accommodative, and another round of fiscal stimulus has further enhanced sentiment. So far, the Fed has used the power of its record-setting $7.6 trillion (and growing) balance sheet while congress has added $5.5 trillion of fiscal stimulus. Furthermore, Chair Powell has said the Fed is “not even thinking of thinking about raising interest rates.” Maybe most important of all is the advancement on the vaccine front. Vaccines have been widely distributed with very few setbacks, accelerating the timetable for recovery. From stimulus to vaccines, equities continue to experience positive tailwinds, as the S&P 500 topped 4,000 for the first time. These advancements have all served as major catalysts for sectors that were harder hit over the past year, and we are seeing those names thrive as the economy begins to open. 

Despite bouts of volatility, equity markets largely surged higher in Q1, as sector rotation continued to play out. Through quarter end, the S&P 500 was up just over 6%, the Dow up over 8%, yet the Nasdaq up just over 1% after gaining over 43% last year. Energy and Financials lead the way this quarter, gaining over 32% and 16% respectively, leading to the significant outperformance of value versus growth. The S&P 500 value index completed Q1 with the largest quarterly outperformance of growth in 20 years with a total return of 11.3% while growth finished just below 1%, marking the first period of outperformance after 12 straight years of underperformance. Since quarter end, the Nasdaq (up 8%) has begun to show more strength, but it is still underperforming both the S&P and the Dow, (up over 11%.) Needless to say, there is still plenty of ground left to cover, but it is encouraging to see breadth in this bull market. 

In February, we also witnessed interest rates jump higher as yields on the 10-year Treasury hit their highest level in over a year, which led to a brief dip in the equity markets. With rates this low, there has really been no alternative for investors to achieve yield: the only asset class with outperformance potential was equities. However, this jump in rates saw many investors flee to this “safer,” non-equity-based investment, though the yields were only marginally higher. As noted before, the Fed continues to stress that rates will remain unchanged in the next few years, so there should not be too many moves higher in the near-term, but this will be important to keep an eye on. Given volatility in the markets the last 13 months, it is clear some investors would welcome the opportunity to earn some “risk-free” yield. It is important to note that rising rates does not affect all industries the same. Higher rates traditionally have negative effects on technology and sectors reliant on borrowing at low rates to stimulate growth., but this would serve as a tailwind for financials and other sectors as well. Even with the rising rates, domestic equities managed to gain ground for both the month and the quarter, seemingly on the hope of strong economic activity the rest of the year. 

Ultimately, GDP estimates continue to grow as vaccine rollouts remain ahead of schedule and stimulus continues to be pumped in. Even the Fed has predicted one of the biggest booms in history, with 2021 estimates for GDP growth topping 6.5%. We appear to be on the way to a full reopening, which explains why many of the stocks hampered by shutdowns are seeing a rapid recovery. Though sentiment is good and momentum continues to be strong, it is always wise to remain cautious in a period filled with such high hopes. Though our outlook remains positive, we will continue to remain vigilant as we navigate the volatility that will come. It is incredible to see how far we have come in 12 months, and we hope to continue this path to recovery.  

John Webb 

Financial Advisor 
Pinnacle Asset Management 
Raymond James Financial Services 
Kidd Private Wealth Group