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After a brief divergence in March, everybody got to bat in April. The DJIA, the S&P 500 Index, and the NASDAQ Composite have all risen to new highs. The S&P MidCap 400 finally caught up, with the S&P SmallCap 600 settling into a trading range within 2% of its all-time high. April has been a very good month for equities, with every primary equity index we follow, domestic and international, in positive territory for the year. As institutional investors rotated out of energy and technology, the ongoing Bull Market rally has expanded to include value and growth, large cap and small cap, as well as defensive and aggressive sectors.
As institutional investors continued the portfolio rebalancing that started in March, some new leadership emerged. While the energy sector continues to sit atop the leader board YTD, it was definitely a source of profit-taking in March and April. Financial stocks are now in charge. The S&P Composite 1500 Financials Sector is up +22.44% for the year, with the S&P Composite 1500 Industrials and Materials Sector up +16.58% and +16.48%, respectively. In a similar manner, while small cap and mid cap equities are boasting the best numbers YTD, large cap equities, bolstered by a rotation into large cap value, are pushing towards the front of the pack. The result is a very broadly advancing stock market, with excellent long-term trends.
International equity markets had a complete role-reversal during the institutional rebalancing. The leadership that had been firmly in the grasp of emerging markets rotated back to European equities, which are now leading the way. The MSCI Emerging Markets Index is only up +5.93% YTD after rising over +12% in January and February. The MSCI Europe Index, which had been stuck in a narrow trading range during January and February, broke out in April and is now up +9.53% YTD.
Investment grade bond markets found a bottom in March after declining nearly -4%. The Bloomberg Barclays U.S. Aggregate Bond Index is now -2.70% for the year after a small rally in April. The Bloomberg Barclays Municipal Bond Index is up +0.67%, and the Bloomberg Barclays U.S. Corporate High Yield Bond Index is up +1.86%. The Bloomberg Barclays Global Aggregate Index is down -2.97%. The headwinds for bonds continue to be inflationary threats from higher prices and higher labor costs as the economy continues to expand. In March, the Consumer Price Index rose +0.6%, primarily due to higher energy costs, and has risen +2.6% over the trailing 12 months.
While inflation provides negative pressure for bonds, it can provide positive pressure for stocks. In the basic choices between stocks, bonds, and cash, stocks are clearly the most favored investment. Nearly zero market rates hurt the cash markets, but buoy the equity markets. Higher prices favor higher corporate profits. Lower unemployment means more jobs and more disposable income. Most certainly there will be surprises down the road and associated corrections, but we have already had three minor corrections in the S&P 500 Index in 2021 and all were handled reasonably well. A deeper correction could help the bond market snap back into positive territory as well.
It isn’t very often that you get to bat through the entire rotation, on the ball diamond or in financial markets. It does quickly become a party, however, when the momentum builds and everybody starts to believe that they too will get on base. April has been a pivotal month for equities, and even provided a reprieve for bonds. We made tactical adjustments in April, adding financials, natural resources, and basic materials where appropriate while deleting emerging markets, small cap growth, and mid cap growth. Equity portfolios are well positioned, with bond portfolios primarily allocated to high yield funds. All systems are GO!
Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.
© 2021 Edward D. Foy.
Sources: Bloomberg.com, Marketwatch.com, StockCharts.com, Morningstar.