Review: First Quarter 2021
A great deal can be said about the first quarter of 2021, but the biggest event has been the widespread introduction of the Covid-19 Vaccine. We often call something a “game changer” and this vaccine has been one.
To put the impact in perspective, we can look at projected gross domestic product (GDP). This represents the growth or shrinkage of the U.S. economy. For 2020 it was a negative 3.5%. The Federal Reserve (FED) estimated in December that the GDP growth rate for 2021 would be 4.2%. The last time that the U.S. economy grew by 4.8% was in 1999, that’s 22 years ago! On March 17th they revised the projected growth of GDP to 6.5%! The last time the U.S. economy was near that level was in 1984, 37 years ago.
The growth rate that is being projected by other organizations, such as the International Monetary Fund, are all similar, for the U.S. This type of growth is generally associated with developing countries, not a developed country.
The reason I think this is so important is that it tells you what is happening to the long-term strength of our economy. Such a growth rate is leading to a reduction in unemployment, greater consumer spending and greater corporate income. These factors have had a big influence on the gains in the U.S. stock market.
Inflation and Bonds
As we saw this past quarter, stocks went up, but bonds were down. The 10-year Treasury Note, which lost value in the fourth quarter of last year ending at 0.913, continued its rise, ending the quarter at 1.749%. This means that owners of 10-year Treasury Notes that bought at the end of 2020 and decided to sell at the end of this quarter would have lost money. In a similar vein, using the Bloomberg Barclays US Aggregate Bond Index, bonds lost 3.13% in total return for the quarter.
As the economy heats up interest rates tend to go up, reducing the value of bonds that were issued previously at lower rates. The FED has indicated they want to keep interest rates in a narrow band. To make this happen the FED has been buying bonds. As we enter this current quarter the 10-year Treasury Note has held in a range between 1.6% and 1.78%. This means, for now, interest rates have stabilized.
In this environment it is a good idea to diversify bond holding by maturity dates. It also helps to shorten the length of the time before the bonds will mature. This is another form of diversification that is not discussed often but is helpful.
Economic Impact on Markets
With the economic stimulus, the potential for an injection of federal money into infrastructure, an increase in manufacturing activity and more consumer spending the economy looks bright. One would expect to see the stock market to remain strong and the bond market to stabilize.
Unfortunately, as with all good things, there are some potential problems. One is that inflation might get ahead of the FED. Another is the lack of enough micro-chips for business. The geo-political situation is tense. Other countries are not in the same good shape as the U.S. and that could impact our exports. The international situation with China a Russia could be better.
The S&P 500 ended the quarter at 3973, up 5.8%. The S&P Mid Cap index closed at 2609, up 13.1% for the quarter. The S&P Small Cap index closed at 1319 up 17.9% for the quarter. As you can see, the mid cap and small cap stocks had a major upturn in the first quarter of the year as they had in the last quarter of 2020.
As stock prices rose the change in yield on bonds varied. The 10-year Treasury Note rose from 0.913%, at the end of 2020 to 1.749% at the end of the quarter. This increase resulted in a loss of value for the period. The Bloomberg Barclays US Aggregate Bond Index yield increased, from 1.12% at the end of 2020 to 1.61% for a loss of 3.13% for the quarter.
It seems to me that the impact of the Covid-19 vaccine is going to have a positive impact across the economy. Consumers are ready to get out and do things; travel, restaurants, hotels, airlines and buying things; houses, appliances, cars. Since the consumer makes up about 67% of the economy we should be in good shape.
April 21, 2021