Portfolio Research Director, Kevin E. Donovan, CFA, shares his thoughts on market performance in the first quarter of 2021.

Kevin E. Donovan, CFA
Kevin E. Donovan, CFAPortfolio Research Director

Hello, I’m Kevin Donovan, Portfolio Research Director at CJM Wealth Advisers, and spring is here and that means it’s the end of the first quarter. And it was a good first quarter for stock returns. So let’s jump right in and look at the first chart here to show the major index returns. Just using round numbers here, you can see the Dow Jones rose 8%, the S&P 500 up about 6%, international stocks up about 3%, and the bond index declined about 3.5%. We’ll talk a little bit about bonds in a minute, but first, just talking about the stock market performance, it pretty much boils down to three distinct periods corresponding to the three months of the quarter. January, there was no real direction in stocks, pretty much were treading water during that whole month. But in February, earnings results started coming in.

Now the expectations were that we were going to see a decline in earnings for the S&P 500 companies, but actually earnings increased for those companies. So, that positive surprise boosted stocks up a little bit. But what really kick-started things was the passage of the stimulus bill in early March here in the US. Now, you can start to see the separation between the US stock index performance and the international index, which didn’t have the benefit of the stimulus, and that really helped the US to outperform for the quarter as a whole.

And it’s just an interesting thing about the performance in the US index or even around the world, is that we are beginning to see value stocks outperform growth stocks for the first time in quite a while. Now, last year, when the economy shut down because of COVID, technology stocks still continued to do well, and growth stocks outperformed significantly value stocks, which are the energy companies, financial companies, industrials. But this year, energy companies have done really, really well, as oil prices have increased. So the sector as a whole in energy is up over 20% for the first quarter. Financials also had a double-digit increase for the sector as a whole. So we’re starting to see the market turn a little bit towards the value side. At least, the performance is catching up a little bit there.

Looking to the bond market, yes, the bond index did decline, mostly a function of an increase in bond yields. And you can see that on our next chart here. This is looking back to the beginning of this year, when the yield on the 10-Year Treasury Note started below 1%, and by the end of the quarter, rose up to 1.75%. Now this is a significant increase in the 10-year yield on a percentage basis, which caused selloff in the bond index and in stock prices overall.

Now the index… Well, first of all, let’s go back and look at the past year and see that relationship. So the darker line is the bond yield over the past year, and the lighter line is the US aggregate bond index. And you can see through August of last year, as bond yields declined, the index did pretty well and increased. And then at the start of this year, when bond yields really started to sharply go higher, the index declined to, like I said, 3.5% loss for the quarter so far.

Now, the bond funds that we use in our portfolios that you own in your portfolios, did not fall by this much. All of our bond funds did better than this. The reason for that being the index holds a majority of longer-dated government bonds, which are considered safe from a credit worthy standpoint. The government’s not going to default on those bonds. The risk they have is interest rate risk. So when like what’s happening now when yields rise, the bond prices on those bonds are going to fall. Our bond funds hold a more diversified portfolio. They hold corporate bonds, more credit-sensitive bonds. So, bonds that do better when the market improves, like high yield bonds are included in that. So, the bond funds overall that we hold did better than the index as a whole.

Looking forward. There are a few things we’re going to be keeping our eye on over the next quarter. And over the next, as we go out through the year, one of them is, again, going to be earnings this quarter, however earnings are expected to dramatically increase compared to the prior year. So if you go back a year ago, the economy was virtually shut down, this year, we’re opening back up, so the earnings on the S&P 500 are expected to rise about 24%. It’s a very high hurdle to clear, so we’ll see how companies do when earnings start being reported towards the end of April and then through May. We’re also going to be looking at employment numbers. They are showing some improvement. We would like to see our employment improve more, obviously, more people working, the better the economy is, so that would be a plus. So hopefully we’ll see that. And also we’ll be looking at COVID infection rates, hopefully, as more and more people get vaccinated and the rollout continues to more age groups and more employment sectors, that we’ll see the economy improve as well.

So, that’s it for this quarter. Thank you for being clients of ours, and look forward to talking to you soon.