April 2021 Market Update

By Brian Johnson, Viridian Chief Investment Officer and Shareholder

Summary: The first quarter of 2021 saw a continuation of many trends that began in the closing months of 2020. Equity markets moved higher, and value stocks continued to outperform growth stocks. Bond markets continued to struggle relative to stocks, as short-duration bonds offer little yield and longer-duration bonds faced the headwind of quickly rising rates.

Stocks posted strong gains for the 1st quarter of 2021. The S&P 500 index (S&P) was up 5.8% for the quarter. When combined with the gains over the final three quarters of 2020, that put the S&P up 53.7% since a year earlier. That is the fourth best 4-quarter return on record, topped only by three periods in the 1930s. Over the last year, markets went through :
• An extreme “waterfall” stock market decline due to COVID-19 concerns a year ago;
• Drastic shutting down of much of the U.S. (and global) economy;
• An incredibly accommodative Fed;
• Three rounds of U.S. government stimulus – totaling over $5 trillion;
• Historically rapid vaccine development and distribution;
• An economy now clearly in the process of reopening;
• Corresponding increases in corporate earnings;
• Most U.S. stock indices reaching new all-time highs.

The first quarter of 2021 saw stocks dramatically outperform bonds. Within the stock market, there was a continued shift in strength—from high-growth stocks, e.g., Amazon, Zoom, Netflix (and many others that did well in 2020 despite the pandemic), to “Value” stocks, e.g., energy and financials (which are sensitive to the economy, and were depressed for most of 2020 due to the COVID-induced slowdown). International equities also did well.

Some specific numbers from the first quarter:
• The S&P 500 rose 6.17%;
• The NASDAQ Composite Index rose 2.78%;
• Internationally, the MSCI EM (emerging market stock) Index rose by 2.3%, and the MSCI EAFE (developed country stock) Index rose by 3.5%;
• With short-term interest rates held lower by the Fed, Treasury bills returned just 0.01% for the quarter;
• Bond values overall fared poorly, as inflation concerns pushed interest rates higher (and bond prices lower):
• The Bloomberg Barclays U.S. Aggregate Bond Index fell 3.4%;
• Long-term Treasury bonds suffered their second worst quarter ever, dropping 13.5% in value for the quarter.

So, what now? We remain in the midst of a secular (very long-term) bull market that began in 2009 at the low point of the Credit Crisis bear market. Twelve years later, there are certainly far fewer bargains available, and stocks in general trade at far higher valuations (e.g., Price/Earnings ratios) than in 2009.

Still, there is a saying that bull markets don’t die of old age; they are killed by the Federal Reserve (Fed). If that is the case this time around, there seems to be little chance that the bull market will end soon. The Fed has been clear in their continued belief that, rather than tightening credit and raising short-term interest rates to dampen economic growth, the opposite is true, i.e., more accommodation is necessary. That apparently will only change after inflation reaches or exceeds their target of 2% and the economy reaches full employment.

Even then, the Fed will likely wait until they feel comfortable that our economy on the whole is solid and stable. For now, the Fed’s stance, and the “weight of the evidence” (of economic and market indicators) that we so often cite—the economic recovery, investor optimism, rising earnings, and a bond yields that remain unattractive relative to stocks on a real return basis—continue to suggest that the path of least resistance for stocks remains higher.

[1] Data from Ned Davis Research

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