Against the backdrop of heightened volatility in March, the S&P500 (+4.6%) and the Dow Jones (+6.7%) rounded out their best month since November 2020, with both benchmarks posting new highs in the final week of the month. The Nasdaq 100 (+0.5%) consolidated recent gains as growth names felt the pressure of rising interest rates. In comparison, the Russell 1000 Value Index (+5.9%) outpaced the Russell 1000 Growth Index (+1.7%) by a massive four percentage points after gaining six percentage points in February (being the most significant outperformance since March 2001). The ASX 200 (+2.4%) gained only modestly compared to the global benchmarks, mainly due to the decline in commodity prices.
The rotation from Growth into Value and Large-cap into Small-cap continued in Q1 after beginning in October. Rounding out the quarter, the Russell 2000 (+12.8%), S&P 500 Mid-cap (+13.6%) and the Russell Micro-cap (+23.8%) were the best performers.
Looking at the US sector level during March, the often defensive Utilities (+10.6%) and Consumer Staples (+8.3%) both bounced during the month, pushing both sectors back into the green for the year. REITs (+6.5%) had another excellent month posting their fifth consecutive month in positive territory. The cyclical sectors also remained strong, led by Financials (+5.8%), Industrials (+8.8%) and Basic Materials (+7.7%). Energy (+2.7%) consolidated recent gains after a blistering start to the year. Since the beginning of 2021, Energy (+30.7%), Financials (+15.8%) and Industrials (+11.4%) are the only sectors in double-digit territory.
March 2021 Summary:
- The vaccine rollout and the fiscal stimulus plan in the US have exceeded market expectations since the start of 2021
- Volatility returned, and equities found a way to continue higher, with the SP and Dow posting new highs
- The US 10Y yield rose 83bps since the start of 2021, its largest quarterly gain since Q4 2016
- The AU 10Y yield fell (-9bps) to +1.78% during March but remained volatile with an expanded trading range
- Consumer and business sentiment moved back towards pre-pandemic levels in Australia
- The unemployment rate in Australia dropped to 5.8%, with the participation rate at all-time highs
- The Australian housing market remained in focus, posting a healthy gain m/m of +2.8% in eight capital cities
- Australian building approvals up a blistering +21.6% m/m in March aided by the HomeBuilder Scheme
- Global Value sectors outperformed Growth by around +10% in Q1, the most significant differential in over 20 years
- The USD was positive for the third consecutive month, pushing commodities modestly lower or sideways
- Corporate earnings in the S&P 500 are forecast to grow over 20% in Q1
US Landscape
US equity markets rallied in Q1 2021 mainly on the back of a larger than expected fiscal stimulus package in the US and the improving vaccine rollout. All this despite a bout of volatility into the back end of the quarter. Combined, the $900B stimulus in late 2020 and the recent fiscal package of $1.9T in March 2021 equal approximately 15% of GDP in the US. Late in March, President Biden announced the American Jobs Plan, which proposes an additional $2.25T in government spending aimed squarely at transport, power infrastructure and communication. This plan will join an additional $1T in spending on social programs, which is expected to be announced formally in April. The stimulus amounts still have to pass Congress, but the intention is unprecedented and much larger than what markets priced in at the beginning of the year. The Biden administration has proposed an increase to the corporate tax rate to fund the infrastructure plan, from 21% to 28%, which could take -9% of next year's corporate earnings according to one estimate.
Vaccine Rollout
Over 590M vaccine doses have now been administered worldwide, in what is the largest vaccine rollout in history. Estimates from Bloomberg show that over 150M doses have been administered in the US, which is more than the total number of positive cases since the pandemic began. Last week alone, there were 2.8M doses administered per day, and the Biden administration is hoping to have enough supply to vaccinate all adults in the US by May. Global case numbers are still trending higher, including in the US. The rate of immunisation is rising faster than the new case numbers, which is promising.
US Treasuries
Long-dated US treasuries surged higher during Q1, with the US 10Y yield rising 83bps which is the largest quarterly gain since Q4 2016. It started in January (+15bps) and continued during February (+34bps) and March (+34bps). Similarly, the 10Y-2Y yield curve steepened significantly, with the spread widening around 8bps in Q1 to +1.58%. Notably, this is the fastest rise since Q1 2008, which almost marked the beginning of the last financial crisis. However, the previous high occurred in the early 1980s in the early stages of a historic rally in equity markets.
The US Dollar
The US Dollar gained ground for the third month in a row (+2.6%) during March, and as was the case with long-dated treasuries, this was the best monthly performance since November 2016. Technicians have noted that the recent lows seen in January provided support near the 2018 lows, yet the 52-week trend of lower-highs remains in place for now. The DXY recently poked its head above the 40-week moving average, which has historically been pivotal for the index.
Commodities
Typically, a stronger USD provides headwinds for commodity prices. After a solid start to the year, the Bloomberg Commodity Index posted a -2.2% decline in March after five straight months in positive territory. WTI was down (-3.8%), and Copper fell (-2.5%). Precious Metals' lustre wore thin, with Gold declining (-1.5%) and has been negative in 7 of the 8 prior months.
The Months Ahead
Valuations remain above historically normal levels; the current market environment is unlike anything we have ever seen before. Substantial fiscal stimulus (pushing 25% of US GDP) and a stronger than expected vaccine rollout (>30% of the US population) is faster and more extensive than the market expected just three months prior at the beginning of the year. Similarly, forward projections and economic data continue to gain ground. Estimates for the US GDP predict a growth rate of +7%, which is the fastest pace since 1984, with the unemployment rate returning to 5% by the end of the year. Global COVID cases are still rising but not quicker than the average rate of vaccination. There are likely to be speed bumps ahead, but the reopening of the economy and the historic government spending plans are sure to support equity markets in the near term.