It wasn’t just the S&P 500 that cheered this double dose of vaccination success and policy support, as the broad-based Russell 3000 Index also posted a 6.4% return for the quarter. In terms of style differentiation, large cap growth was basically flat on the quarter while large cap value was up 11.3%, its largest outperformance since 2001. While large cap growth has come under some pressure due to valuation concerns and sensitivity to higher interest rates, large cap value is basking in the glow of its high sensitivity to vaccination success. Similarly, small cap value returned an astounding 21.2% as a result of the same tailwind. Developed international markets, with inconsistent vaccination results, were up just 4%. Emerging Markets, dragged down by Brazil’s abhorrent COVID data, were up just 2.3%.
Fixed income markets reacted negatively to the anticipated economic growth and rising inflation expectations. The Bloomberg 7-10 Year Treasury Index posted its worst quarterly return since September 1981. The index was down 5.8% for the quarter as the yield on the 10 Year Treasury jumped from 0.92% to 1.75%. Investors in the broad-based Bloomberg Aggregate Index fared slightly better but still with a quarterly loss of 3.4%. Credits spreads tightened for investment grade and high yield bonds by 5 and 50 basis points respectively reflecting the improved economic outlook.
Despite the recent rise in long-term yields, fixed income will still be hard pressed to generate any income over inflation, which means equities remain the preferred long-term investment despite high valuations. The good news is, for longer-term government bonds, their role as a hedge against equity has improved with the recent rise in yields.
Now is a good time to recommit to a disciplined approach to investing, as the FOMO (“fear of missing out”) crowd has driven some investments to speculative excess. While an isolated observation or two can be dismissed, the confluence of these excesses is reminiscent of the Dot.com bubble. Investors have been bombarded with news about the meteoric rise in the price of BitCoin, as well as “meme” stocks like Gamestop hyped on social media. The use of single stock call options and margin debt are both at record highs.
The good news is that, today, all the cool kids are excited about JOMO (“Joy of Missing Out”). JOMO is about by balancing one’s time offline with one’s time online as a part of everyday screen hygiene. Likewise, investors can be better served with a little less FOMO based investing and more JOMO time while they embrace a goal-connected, risk-managed and cost-effective investment approach.
As we emerge from the COVID tunnel of darkness, formidable risks remain on the horizon including climate change, mounting tensions with China, precarious debt levels, and still potential virus mutations.
Let our recent collective resiliency provide us with optimism and confidence to conquer these emerging challenges.
Let us help you develop a plan to navigate times of uncertainty with confidence. Schedule a call today!
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Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index [net div.]), US Bond Market (Bloomberg Barclays US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Barclays Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2020, all rights reserved. Bloomberg Barclays data provided by Bloomberg. The views in this material were those of the Advisor at the time of writing this report and may reflect the views of WCAP. These views are intended to assist clients and do not constitute investment advice.