With the end of the quarter fast approaching today we’ll get a jump start on what’s been working (and not) and also take a 1-year lookback at every major asset class from their (almost) lows of a year ago. The latter represents, in our view, a better measure of how markets have performed since the start of the global pandemic recession.
Three buckets to cover this landscape, with all data presented on a price return, dollar basis:
#1: Global equities (best 1-year performer by cluster in bold):
- S&P 500: +5.8 pct YTD, +51.1 pct 1-year
- Russell 2000: +12.5 pct YTD, +88.2 pct 1-year
- NASDAQ: +1.9 pct YTD, +68.5 pct 1-year
- MSCI EAFE (non-US developed economies): +5.0 pct YTD, +40.8 pct 1-year
- MSCI Emerging Markets: +3.1 pct YTD, +50.7 pct 1-year
- MSCI Frontier Markets: +4.1 pct YTD, +34.7 pct 1-year
- MSCI Japan: +3.8 pct YTD, +39.6 pct 1-year
- MSCI Germany: +4.5 pct YTD, +51.1 pct 1-year
- MSCI France: +4.8 pct YTD, +41.4 pct 1-year
- MSCI Italy: +6.8 pct YTD, +45.6 pct 1-year
- MSCI UK: +7.8 pct YTD, +30.1 pct 1-year
- MSCI China: +0.5 pct YTD, +38.4 pct 1-year
- MSCI South Korea: +3.6 pct YTD, +86.3 pct 1-year
- MSCI Taiwan: +11.8 pct YTD, +74.0 pct 1-year
- MSCI India: +5.7 pct YTD, +68.3 pct 1-year
- MSCI Brazil: -12.6 pct YTD, +23.8 pct 1-year
Takeaway (1): the most notable standout is clearly the Russell’s performance, not just year-to-date but over the last 12 months. We’ve been calling out this relative strength over the last week as a sign US small caps are quite overextended relative to the S&P 500.
Takeaway (2): US equities have remained a superior place to allocate capital relative to MSCI EAFE or Emerging Markets. Individual countries have outperformed in Q1 2021, true. But it does seem clear that US fiscal and monetary policy have given domestic stocks a sustainable edge.
Takeaway (3): China’s Q1 underperformance is the most important number here. For all its initial success in fighting the pandemic, it’s clear the Chinese consumer economy is not back to full strength (we we’ve noted many times in our traffic congestion analyses). On top of that, the government there has been pretty rough on its Tech champions and Tencent/Alibaba are 20 percent of MSCI China. Lastly, deteriorating US-Sino relations don’t help. The clear winners on the last count are South Korea and Taiwan so if you’re looking for incremental EM exposure those are good places to start.
#2: Global fixed income (price return only, best/least-bad 1-year return in bold)
- US 1-3 Year Treasuries: -0.1 pct YTD, -0.4 pct 1-year
- US 3-7 Year Treasuries: -2.1 pct YTD, -1.7 pct 1-year
- US 7-10 Year Treasuries: -5.3 pct YTD, -5.4 pct 1-year
- US +20 Year Treasuries -13.4 pct YTD, -16.3 pct 1-year
- US Investment Grade Corporates: -6.2 pct YTD, +5.7 pct 1-year
- US High Yield Corporates: -0.4 pct YTD, +13.1 pct 1-year
- 1-3 Year non-US Sovereign Debt: -3.4 pct YTD, +6.4 pct 1-year
- All Maturity non-US Sovereign Debt: -5.8 pct YTD, +6.2 pct 1-year
- Emerging Market Sovereign Debt: -5.7 pct YTD, +9.7 pct 1-year
Takeaway: there’s been no place to hide from the global bond market selloff this year aside from very short-term US Treasuries. Those at least can lean on the Fed’s promise of low rates through their maturities. Opinions differ on whether the selloff in longer-term fixed income is over; we are in the “no” camp. While US monetary stimulus may have peaked, fiscal stimulus most likely has not. This should keep the inflation narrative alive through Q2 2021.
#3: US equity sector performance (listed best to worst for Q1)
Large Caps, broken up by Q1 out/underperformers vs. S&P 500
- Energy: +33.1 pct YTD, +65.9 pct 1-year
- Financials: +16.6 pct YTD, +58.6 pct 1-year
- Industrials: +11.0 pct YTD, +59.9 pct 1-year
- Materials: +10.1 pct YTD, +73.5 pct 1-year
- Real Estate: +9.2 pct YTD, +28.2 pct 1-year
- Communication Services: +7.1 pct YTD, +62.3 pct 1-year
- Consumer Discretionary: +3.3 pct YTD, +63.7 pct 1-year
- Health Care: +3.2 pct YTD, +34.7 pct 1-year
- Technology: +2.0 pct YTD, +61.2 pct 1-year
- Consumer Staples: +1.7 pct YTD, +27.6 pct 1-year
- Utilities: +1.2 pct YTD, +14.6 pct 1-year
Takeaway: Q1 was as classic a cyclical rotation as you’ll likely see in your lifetime – the only weird thing is that it came 9 months after the “cycle” started and it was a very fast turn when it came. You can partly chalk this up to the move in 10-year Treasuries, which only broke out above 1 percent on January 6th, 2021. That confirmed Q4’s move in Financials and pumped more oxygen into the cyclicals trade generally.
Small Caps, broken up by Q1 out/underperformers vs. the S&P 600
- Energy: +47.4 pct YTD, +182.5 pct 1-year
- Consumer Discretionary: +38.0 pct YTD, +191.0 pct 1-year
- Financials/REITs: +17.5 pct YTD, +56.4 pct 1-year
- Industrials: +17.3 pct YTD, +89.9 pct 1-year
- Consumer Staples: +16.4 pct YTD, +63.2 pct 1-year
- Utilities: +15.8 pct YTD, +38.2 pct 1-year Technology: +11.6 pct YTD, +87.7 pct 1-year
- Materials: +10.9 pct YTD, +106.9 pct 1-year
- Health Care: +8.3 pct YTD, +81.4 pct 1-year
Takeaway: much the same message as large caps – cyclicals have been working.
Conclusion to all 3 points: we continue to favor US equities over EAFE and EM, although we do like the UK, South Korea and Taiwan. Among sectors, we remain positive on cyclical groups (banks, consumer leisure/reopening, Energy, Industrials) even though they’ve obviously had great runs. Until Fed Funds Futures put +30/40 percent odds on a future rate increase we believe the US cyclical recovery trade will continue to work.