‘Are we there yet?’ A view from the backseat, as global equity rides shotgun
by CHRIS KARAM, CIMA®
Chief Investment Officer
As Published in InvestmentNews – RPA Convergence
(See publication here: https://www.rpaconvergence.com/global-equity-market-returns/)
Later this year, the Jeep brand of vehicles is relaunching its iconic Wagoneer with a more modern touch of features. The original version of the “family truckster” was a mainstay for family road trips and for homes located in elevated terrains where station wagons would not suffice. As the youngest of three kids, with a father afraid of flying, I was that little kid yearning for attention and asking that cringeworthy question, “Are we there yet?” My siblings tried their best to keep me quiet in the third row of a station wagon while my parents looked forward and kept us on the move.
The first quarter 2021 was full of robust economic growth, deficit spending levels not seen since World War II, interest rate volatility and inflation concerns. Yet all those important metrics are riding in the backseat begging for attention – just like I was in that ’80s Buick Electra – while the global equity markets continued to ride shotgun and drive diversified portfolios higher.
The momentum from the fourth quarter 2020 carried through the first quarter 2021 with market leadership continuing to come from small caps and commodities. Small caps rallied to finish the quarter with an 18.2% return, while commodity prices posted another strong quarter showcasing a 6.9% result. Rising commodity prices supported a strong quarter for the energy sector return of 29.3% year to date as of March 31. These diversifying asset classes were supportive of portfolios in the second half of 2020 and their momentum could remain positive contributors in the second quarter, with a stagnating U.S. dollar, government stimulus and strong consumer spending.
Fixed income detracted from portfolio performance in the first quarter, with medium- and long-term interest rates moving significantly higher. The 10-year U.S. Treasury yield began the year at 1.08%, only to finish at 1.74%. This type of move devalued those same treasury bonds, sending the Bloomberg Barclays U.S. Aggregate Bond Index to a -3.4% total return to open the year. The diversifying fixed-income asset classes struggled to add value, with rates moving higher, but high yield bonds measured by the Bloomberg Barclays U.S. High Yield Corporate Index did manage to eke out a small quarterly gain of 0.8%. This type of interest rate uncertainty is likely to persist in the second quarter, due to competing economic forces of strong employment growth, rising levels of Covid-19 inoculations and the concern about rising inflation, balancing the strong global demand for income.
The evolving landscape makes today as good a time as ever for RPAs to conduct a menu construction exercise, ensure the portfolio offers ample diversification potential and preach the benefits of patience as markets rotate.
This tug of war is likely to unfold throughout the remainder of 2021 and likely into 2022, as the global equity markets will begin to reconcile the sustainability of multi-trillion-dollar fiscal stimulus bills, earnings growth rates and consumers’ ability to impact higher retail sales growth.
I just returned from this year’s spring vacation with my wife and three kids in our version of the family truckster. My youngest was bored after 30 minutes of a 15-hour car ride and wondering why we don’t have a car equipped with WiFi. It is a bit nostalgic to think history repeats itself, but it also reminds us that it was a full generation or two ago where rising bond yields, energy prices and inflation truly mattered to global equity investors. Investors will soon know where this road trip takes us.
Important Disclosures:
The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (“IFP”), IFP Securities LLC, dba Independent Financial Partners, and its advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Opinions expressed are subject to change without notice and do not consider the particular investment objectives, financial situation, or needs of individual investors. Past performance is no guarantee of future returns. Investors cannot invest directly in an index. Diversification and asset allocation do not guarantee returns or protect against losses.