“Good investors gather information, put that information into current and historical context, then make sound decisions.”
Thus far we are still enjoying the positive momentum from the Election Rally. Since that Monday before the election to the 2021 market high on February 16th, the S&P 500 Index rose +19.95%. This has provided markets with a reasonable push into 2021. There was a very brief -4.6% correction the last three days of January that was quickly recovered the first week of February. Since February 16th, equities have also been correcting, but on a year-to-date basis everything is steady as she goes. Intraday market volatility has picked up during the current correction, but daily and weekly volatility continues to be relatively low.
While 2020 was a year that featured large cap equities, 2021 is starting out to be much more favorable towards mid cap and small cap equities. Year-to-date, the S&P 500 Index is up +3.57%. But the S&P 400 Mid Cap Index is up +9.87% and the S&P 600 Small Cap Index is up +15.29%. The strongest sector for the year is energy, with the S&P Composite 1500 Energy Sector Index already up a remarkable +28.72%. Part of this move is due to traditional oil industry components and part is from renewable energy components. Another top performing sector is the S&P Composite 1500 Financials Sector Index up +11.99% YTD. The Dow Jones Internet Composite Index is up +8.75%. The poorest performances in 2021 have been in the utilities and consumer staples sectors. The Dow Jones Utilities Average is down -2.91% and the S&P Composite 1500 Consumer Staples Sector Index is down -3.23%.
Slow and steady has also been the watchword for international equities. The MSCI EAFE Index is up +4.12% on the year, with the MSCI Europe Index up +2.90%. The best performance of 2021 has been in the emerging markets, with the MSCI Emerging Markets Index up +8.37%. As the world economies continue to see declines in the COVID impact, and expansions associated with the reopening of borders, their prospects should improve. The emerging markets are the most sensitive to the U.S. economy, which is leading the rest of the global markets in response and recovery.
Bond markets are having a very different journey in 2021 with the Bloomberg Barclays U.S. Aggregate Bond Index down -2.09% year-to-date. With short-term interest rates still hovering near all-time lows, the Bloomberg Barclays 1-3 Month T-Bill Index is up +0.01%. The Bloomberg Barclays Municipal Bond Index is down -0.41%, and the Bloomberg Barclays Global Aggregate Total Return Index is down -1.97%. The only bright spot is the Bloomberg Barclays U.S. Corporate High Yield Bond Index, up +1.17%. Bond markets enjoyed a prosperous 2020, but there are concerns about the possible effects of inflation later in the year. Commodity prices are higher across the board and, as long as retail sales remain strong, it can be argued that eventually those price increases will be passed through to the consumer, which will raise prices, and inflation. Even mild inflationary pressures can provide negative pressure on bond markets when interest rates are so low.
This may be a good time to step back and look at the big picture. From a fundamental economic perspective, it is hard to argue with the potential benefits for equity markets as the economy continues to open up. Americans are hungry for travel, and restaurants, and buying stuff in person instead of on the internet. There is a huge pent-up demand for this basic consumerism that will not be denied. There are two additional positives for equities. The first is the additional stimulus money being distributed by the U.S. government. The first stimulus proved to be a boon that helped carry the economy through the first wave of COVID, and there’s no reason to think it can’t happen again. A second long-term positive for equities would be congress passing an infrastructure bill which would stimulate jobs and industrial production. The big picture holds many possibilities, making it difficult to be pessimistic at this juncture. Steady as she goes.
Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.
Sources: Bloomberg.com, Marketwatch.com, StockCharts.com, Morningstar.