Although there were some memorable events in the last three months, the first quarter of 2021 had much less drama than the first quarter of 2020. GameStop stock was frequently in the news as there was a tug-of-war between Wall Street and individual investors. Reddit (news aggregation and blogs) and Robinhood (online broker for small investors) both gained a lot of publicity during this confrontation. In the sports world, the oldest player in the NFL proved once again why he is the greatest football player of all time as he turned Tampa Bay from a mediocre franchise into Super Bowl champions. In terms of public health, the big news was the distribution of the Pfizer, Moderna and Johnson & Johnson vaccines. COVID-19 cases, hospitalizations and deaths continued to decline throughout the quarter, and a sense of optimism about the future began to take hold.
The global stock markets continued their positive momentum from the fourth quarter of 2020. Corporate earnings and economic growth trended higher, while unemployment moved lower. In terms of market sectors, there was a reversal from last year. Instead of technology companies outperforming everything else, it was the value industries—financials, energy and materials—that led the way. Additionally, small company stocks rallied much more than larger companies, which is usually the case when the economy is in the early stages of recovery. Even though interest rates moved higher, the Federal Reserve maintained its position that inflation was still under control, and while the labor market improved, it was still in need of accommodative policies. Another stimulus plan was passed that provided $1,400 checks to many U.S. taxpayers, as well as assistance to states, local governments, schools and small businesses. The ink was barely dry on this legislation when the focus turned to infrastructure. The initial proposal included funding for highways, bridges, airports, the electric grid, waterways and many other projects. In the coming months, there will be much debate on what needs to be included and how to pay for it.
While bullish sentiment has been prevalent so far in 2021, there are reasons for caution. The capital markets have “priced-in” good news that is anticipated regarding virus containment, economic recovery and strong corporate profits. A disappointment in any of these areas will likely lead to some market volatility. Fears about COVID-19 have now been replaced by concerns that a higher level of inflation might materialize in the future given record amounts of government spending. Additionally, four of the last five years have resulted in solid returns for global stocks so market valuations may be a little stretched. Taking these factors into consideration, we remain in the glass-half-full camp, but short-term market movements are impossible to predict. Our Investment Committee builds portfolios that have a time horizon beyond 10 years. With that perspective, the investing experience is almost always a positive one.
In terms of first quarter market performance, small cap stocks (Russell 2000 Index) led the way, returning 12.7%, followed by mid cap stocks (Russell Mid Cap) at 8.1%. For large cap stocks, the value style dominated the growth style, as the Russell 1000 Value gained 11.3%, while the Russell 1000 Growth was barely positive (+0.9%). Global stocks (MSCI All-Country World ex US) were up 3.5%. Lastly, with interest rates moving higher, bond prices, as measured by the Bloomberg Barclays Aggregate Bond Index, declined by 3.4%.
As we move forward into the second quarter of the year, we will keep in mind one of Tom Brady’s best quotes: “You have to believe in your process. You have to believe in the things you are doing to help the team win.” Our “team” is our clients, and when you achieve your long-term financial goals, we are all winning.