Global markets entered 2021 with a great deal of optimism. A new president came to Washington with a massive stimulus deal, positive vaccine news allowed for hope that the pandemic was nearing an end, and consumers who had been stuck at home for a year were ready to spend their savings. So far markets have delivered on that optimism, but it has come with some volatility.
There really has been a little of everything so far this year. We saw protesters storm the U.S. Capitol and unfortunately many more Covid deaths. But on the bright side, millions have been vaccinated, economies are re-opening, and sports have returned.
From a market point of view, it’s been a wild ride. Sector rotation has been rapid and severe, security selection more important, and bonds harder to make money in.
Technology stocks began the year on fire. The speculative nature of this rally continued with SPACs raising $97B and many IPOs running on massive demand. But after peaking in mid-February, the sector has fallen out of favour. Trendy ARKK funds—the poster children for this theme—are down 30% from their peak in only a few weeks.
Many are pointing to the bond market for the source of this negative move in speculative growth stocks. As yields move higher with economic optimism, we are seeing a return of the “value” factor. The adage is investors will pay up for growth when growth is scarce, but as stimulus flows to the economy, many new parts of the market experience rapid demand growth, causing a rotation towards the cyclicals.
For the first time in years, energy was the best performing sector this quarter for the S&P 500. The sector had been written off as dead so much so that one of the oldest companies in North America, Exxon Mobil, was kicked out of the Dow Jones Industrial Average last year. Don’t look now, but after energy investment suffered for years, there are concerns energy supply won’t be able to meet the demand of pent-up families hitting the road for a vacation this summer. This has led to many E&P companies gaining over 50% in the quarter.
As energy and yields increased, other defensive areas, such as gold, fell. Whether this was temporary profit taking after several good years is too soon to call. Inflation is on the verge of returning to many areas, but a weaker dollar may be needed for gold to shine once again.
Given the strength of markets over the last year many are calling for a correction, but we have already had it. It just happened in individual sectors, one at a time. Rolling corrections are healthy. Broader markets remain close to all-time highs, partly a result of stimulus cash. Overall, we see potential for very rapid economic growth in the near term.
So far 2021 has had something for everyone and every sector. Some of it better than others.
The move-in rates are going to be the story for the rest of the year. Will we get a taper tantrum 2.0? The Bank of Canada was the first of the G7 Central Banks to announce a scaling back of their quantitative easing programs. How far behind is the FOMC? Can Powell do enough to signal these moves in advance the market is ready for them? We will have to wait and see.
As we enter the second quarter of the year, which is seasonally one of the strongest, we can only guess what will occur. Last week, we witnessed a “family office” with billions of dollars of leverage blow up. And we haven’t touched on the events surrounding GameStop and Melvin Capital earlier this year. But in times of rapid-sector rotation, rotating corrections, and uncertainty, one of the best strategies is to remain active. If taken advantage of, volatility can equal opportunity. The amount of stimulus in the system should keep this rally going longer than everyone expects, but it won’t be as smooth as most of last year. Buckle up and get ready for the ride.
— Greg Taylor, CFA is the Chief Investment Officer of Purpose Investments
All data sourced from Bloomberg unless otherwise noted.
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