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Market Commentary – First Quarter 2021

Markets Reach New Highs in Q12021

Global equity markets had a choppy first quarter, but when the final Wall Street-bell tolled on March 31st, global markets had turned in some very solid performance numbers on their way to new record highs.

And given that investors did see interest rates rise, oil prices jump, inflation worries reappear and continued headwinds from COVID-19 surface, the first quarter returns for the major U.S. and global, developed markets were nothing short of impressive.

For the first quarter of 2021:

  • The DJIA added 7.8%;

  • The S&P 500 added 5.8%;

  • NASDAQ added 2.8%; and

  • The Russell 2000 added 12.7%.

The themes that drove the markets in the first quarter were mostly-positive economic data, the passing of another stimulus package and more COVID vaccines being distributed around the world. Yes, a glass-half-empty investor could find plenty to worry about, especially as the 10-year U.S. Treasury added 83 basis points in the quarter, but the markets seemed to generally ignore most of the negative chatter on their ways to new highs.

For most of the quarter, Wall Street and Main Street held their collective breath until President Biden signed another $1.9 trillion COVID-relief bill, which will provide much-needed relief to small businesses and direct payments to individuals and families. And as the quarter was wrapping up, President Biden introduced a massive $2 trillion infrastructure spending bill and suggested that another relief bill was in the works. Further, we saw that:

  • Volatility, as measured by the VIX, trended modestly lower from 27 to 17 for the quarter, although the end of January saw a significant spike that pushed the VIX north of 37.

  • West Texas Intermediate crude trended up for the quarter, adding about $12/barrel over the 3 months to close out the first quarter at about $60/barrel.

Market Performance Around the World

Investors were thrilled with the quarterly performance around the world, as all 35 of the developed markets tracked by MSCI were positive for the first 3 months of the year. And of the 40 developing markets tracked by MSCI, 29 of them were positive too.


Source: MSCI. Past performance cannot guarantee future results

Markets Surge On

Despite a few spikes of volatility throughout the first quarter, U.S. equity markets continued their surge from the fourth quarter of 2020 and continued reaching new highs. Yes, there were some negative economic data points along the way and yes, the rise in interest rates is generally a headwind for stocks, but the markets reacted more towards additional stimulus as well as faster vaccine rollouts.

The total amount of stimulus and government spending remains to be seen, but just adding the $900 billion package signed before President Biden took office to the most recent $1.9 trillion package Biden signed, gets us to almost 15% of our GDP. Then layer on a proposed $2+ trillion infrastructure spending along with another stimulus package (details yet to be released) and it is clear that Wall Street is reacting favorably – for now – to all this government spending.

The downside – which markets are seemingly ignoring (also for now) – is that taxes are likely to go up. In fact, some are pointing to the recommendation that in order to fund the infrastructure spending plan, the corporate tax rate would be hiked to 28% from 21%, which could cost 9% of next year’s S&P 500 earnings.

Remember the GameStop Saga?

It might seem like a far-away memory, but it was only at the beginning of the quarter that investors began talking about GameStop. And it was only last December that the brick-and-mortar company that was operating in a digital world during a pandemic announced that it was closing 1,000 stores (after closing 783 over the previous two years).

Sure, GameStop executives were suggesting that the worst was over, especially after trimming losses to about $19 million in 2020, which was much better than the losses of $83 million in 2019 and $485 million in 2018.

But Wall Street wasn’t buying it – especially two Wall Street hedge funds named Citron Research and Melvin Capital – as both took short positions expecting GameStop’s stock to fall.

Those two hedge funds (as well as others who shorted GameStop) were simply investing – betting – against GameStop’s success.

But internet chatter from a Reddit community called WallStreetBets intentionally tried to push the stock price higher. Some were trying to fight back against the system, in a nod to the Occupy Wall Street Movement, while others were simply trying to make money by collectively taking on the big hedge funds. Whatever the intent, the small investors of the WallStreetBets Reddit-community did manage to fuel more buying interest, which pushed the price higher, which fueled more speculative buying, which pushed the price higher, and on and on it went.

The result:

  • GameStop opened the first quarter priced at about $17/share (a year earlier, it was under $5/share)

  • By the end of January it was trading in the mid-$300s

  • February saw the stock crater to about $50/share, where it hovered for most of the month before slowly trending back up

  • It ended the first quarter at just under $200/share

  • Institutional short-sellers lost tens of billions

It really did feel like a modern-day David vs. Goliath and many outside of the investing world were suggesting that this would be the next Occupy Wall Street movement. You might remember that the Occupy Wall Street was a protest movement against economic inequality that began in September 2011 and gave rise to the slogan “We are the 99%.”

Only time will tell.

Sector Performance Rotated in Q12021

The overall trend for sector performance for each of the first three months and the first quarter was good, but the performance leaders and laggards did rotate throughout the past few months, suggesting that a sector rotation might be underway.

But for perspective, recall that this time last year, the first quarter of 2020 ended with every single one of the S&P 500 sectors painted red.


  • Q22020 ended with every one of the 11 sectors turning in positive numbers;

  • Q32020 ended with 10 of the 11 positive; and

  • Q42020 ended with all 11 sectors positive.

For the first quarter of 2021, every one of the 11 sectors was painted green. Here are the sector returns for the shorter time periods:

S&P 500 Sector

Q42020 Q12021

Information Technology+11.52% +2.04%

Energy+25.78% +28.22%

Health Care+7.55% +3.92%

Real Estate+4.09% +9.76%

Consumer Staples+5.64% +1.25%

Consumer Discretionary+7.86% +2.93%

Industrials+15.19% +11.68%

Financials+22.52% +16.88%

Materials+13.92% +9.00%

Communication Services+13.52% +8.87%

Utilities+5.70% +3.56%

Source: FMR

Reviewing the sector returns for just the first quarter of 2021, we saw that:

  • All sectors were painted green for the first quarter;

  • The Energy sector once again came roaring back, driven by price of oil jumping another $12;

  • The Financials sector had another wonderful quarter, helped by the Federal Reserve’s stance of keeping rates low through at least 2023; and

  • The differences between the best performing and worst performing sectors in the first quarter was very wide, as the Energy sector’s return was about 23x greater than the Consumer Staples sector’s quarterly return.

Those ranges are the epitome of sector rotation. And the numbers empirically identify the importance of asset allocation and diversification for all investors.

GDP Up Over 4%

On Thursday, March 25th, the Bureau of Economic Analysis announced that Real Gross Domestic Product increased at an annual rate of 4.3% in the last quarter of 2020.

This is after an increase of 33.4% in the third quarter of last year, which should be viewed from the context of how much GDP declined in the middle of 2020 during the worst of the shutdowns due to COVID.

Further, the BEA announced that:

  • Current-dollar GDP increased 6.3 percent at an annual rate, or $324.4 billion, in the fourth quarter to a level of $21.49 trillion

  • In the third quarter, GDP increased 38.3 percent, or $1.65 trillion

  • The price index for gross domestic purchases increased 1.7 percent in the fourth quarter, compared with an increase of 3.3 percent in the third quarter

  • The PCE price index increased 1.5 percent, compared with an increase of 3.7 percent

  • Excluding food and energy prices, the PCE price index increased 1.3 percent, compared with an increase of 3.4 percent

  • Real gross domestic income increased 15.7 percent in the fourth quarter, compared with an increase of 24.1 percent in the third quarter

  • The average of real GDP and real GDI, a supplemental measure of U.S. economic activity that equally weights GDP and GDI, increased 9.9 percent in the fourth quarter, compared with an increase of 28.7 percent in the third quarter

  • Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) decreased $31.4 billion in the fourth quarter, in contrast to an increase of $499.6 billion in the third quarter

Housing Market Declines

Late in the month, the National Association of Realtors reported that for the month of February, Existing Home Sales dropped 6.6% from January after two months of gains. The good news (if you are selling) is that sales are still 9.1% higher than last year and that existing-home prices are significantly higher than a year ago – even surpassing pre-pandemic levels.

Other highlights from the NAR include:

  • The median existing-home price for all housing types in February was $313,000, up 15.8% from February 2020 ($270,400), as prices rose in every region.

  • February's national price jump marks 108 straight months of year-over-year gains.

  • As of the end of February, housing inventory remained at a record-low of 1.03 million units, down by 29.5% year-over-year – a record decline.

  • Properties typically remained on the market for 20 days in February, down from both 21 days in January and from 36 days in February 2020.

  • Seventy-four percent of the homes sold in February 2021 were on the market for less than a month.

But First Time Home Buyers Declining

According to the NAR, home affordability is weakening and this is unlikely to change given tight inventories. Further, if inventory remains tight, affordability will decline further if mortgage rates trend higher. And according to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage was 2.81% in February, up from 2.74% in January.

To underscore the fact that affordability was weakening, the NAR reported that:

  • First-time buyers were responsible for 31% of sales in February, down from 33% in January and from 32% in February 2020.

  • Individual investors or second-home buyers, who account for many cash sales, purchased 17% of homes in February, up from 15% in January and equal to the percentage from February 2020.

  • All-cash sales accounted for 22% of transactions in February, up from both 19% in January and from 20% in February 2020.

Prices Up Everywhere Year-Over-Year

While Existing Home Sales dropped in 3 of the 4 regions, all regions saw significant increases in median prices:

  • Existing-home sales in the Northeast fell 11.5%, but the median price was $356,000, up 20.5% from February 2020.

  • Sales in the Midwest dropped 14.4%, but the median price was $231,800, a 14.2% climb from February 2020.

  • Sales in the South decreased 6.1%, but the median price was $271,200, a 13.6% increase from a year ago.

  • Sales in the West rose 4.6% and the median price was $493,300, up 20.6% from February 2020.

Durable Goods Orders Drop

The U.S. Census Bureau announces the February advance report on durable goods manufacturers’ shipments, inventories and orders. Here are the highlights:

New Orders

  • New orders for manufactured durable goods in February decreased $2.9 billion or 1.1 percent to $254.0 billion

  • This decrease, down following nine consecutive monthly increases, followed a 3.5 percent January increase


  • Shipments of manufactured durable goods in February, following five consecutive monthly increases, decreased $9.1 billion or 3.5 percent to $250.9 billion

  • This followed a 1.7 percent January increase

Unfilled Orders

  • Unfilled orders for manufactured durable goods in February, up two consecutive months, increased $8.4 billion or 0.8 percent to $1,082.0 billion

  • This followed a 0.2 percent January increase


  • Inventories of manufactured durable goods in February, up following two consecutive monthly decreases, increased $2.8 billion or 0.7 percent to $427.3 billion

  • This followed a 0.3 percent January decrease

Hoping for a Good April Run?

MarketWatch notes that the month of April is usually a good month, with stocks posting positive numbers in 14 of the last 15 years. Further, April has been the best month for stocks over the past 20 years and the second-best month for stocks since 1950. And that’s no April Fools.


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