Stimulus, COVID-19 Vaccinations and Rising Rates
The S&P 500 continued to grind higher in March, boosted by another round of economic stimulus and increased vaccination rates in the United States. Even against the headwind of rising interest rates, the S&P 500 gained 4.4% on the month, for a total return of 6.2% year-to-date.
March’s gains were broad-based. Sectors tied to the reopening of the U.S. economy experienced strong gains, with both the Industrial and Materials sectors rising more than 7.5%. Additionally, although Consumer Staples and Utilities typically underperform in a high-growth economy, investors were attracted to their low valuation and each gained more than 8.0%.
What Didn't Work
Technology stocks gained just 1.7% on the month, plagued by high valuations and easing stay-at-home orders. Fixed Income also underperformed, as the Barcap Intermediate Govt./Credit Index fell 0.8%. The 10-Year U.S. Treasury interest rate has risen from 0.9% in January to 1.7% at the end of March. These rising yields have put downward pressure on the values of lower-yielding existing bonds.
What We're Watching
As we move into the second quarter of 2021, investors will continue to evaluate headlines surrounding stimulus, vaccinations, rising interest rates, and economic reopenings. In addition, President Biden will announce plans for a new $2 trillion stimulus infrastructure plan, paid for primarily by various increases in corporate tax rates. An additional spending package of this size, coupled with a period of high economic growth, may lead to higher interest rates and inflation.
While we expect politics, taxes, and higher interest rates to cause some stock market volatility, the reopening of the U.S. and global economies are likely to prove overwhelming. In the U.S., economists have raised their 2021 GDP growth estimates to at least 6.5%, which would mark the highest annual pace of growth since 1984 (Business Insider). So while we will be mindful of the hurdles posed by high interest rates and tax increases, we will ultimately be buyers on market pullbacks due to the tremendous growth the U.S. is set to experience this year.
It has been a historic twelve months on multiple levels. We are reminded in these times to rely on a well-diversified high-quality investment strategy to support your financial plan. Please do not hesitate to contact us if you would like to review or update your plan.
We wish you the best as we move towards longer days and warmer spring weather!
Past Performance is no guarantee of future results. All investments carry some level of risk. The S&P 500 Index is an unmanaged, market capitalization weighted index of 500 common stocks widely regarded to be representative of the US market in general. Russell 2000® Index (U.S. Small Caps): Measures the performance of the 2,000 smallest companies in the Russell 3000®Index, which represent approximately 10% of the total market capitalization of the Russell 3000® Index. Russell Midcap® Index: Measures the performance of the 800 smallest companies of the Russell 1000® Index, which represents approximately 36% of the total capitalization of the Russell 1000® Index which is a mid‐cap index. MSCI EAFE Index: Measures the equity market performance of developed markets outside of the U.S. & Canada. MSCI EM Index: Captures large and mid cap representation across 24 Emerging Markets countries and covers approximately 85% of the free float-adjusted market capitalization in each country. Barclays Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Indices are unmanaged and direct investment is not possible. The opinions expressed are those of the author and not necessarily those of Robert W. Baird & Co. Incorporated.