Which Way is Up?

Asset classes diverged considerably. The kinds of equities expected to benefit most from a stronger economy outperformed. In the U.S., value outperformed growth by 9%, and small caps outperformed large caps by 7%. As with value, global dividend stocks outperformed ACWI by 10%. In contrast to 2020, the U.S. energy and financial sectors returned 31% and 16% respectively, while the U.S. technology sector was up only 2%.2

^{1NFGBI’s benchmark is a blend of 60% ACWI IMI and 40% 3-month T-Bills. NFDBI’s benchmark is a blend of 60% S&P 500 NR and 40% T-Bills. The 1980 comparison is based upon the Bloomberg Barclays U.S. Treasury Index.}

^{Long-duration Treasurys had a terrible quarter, whereas 3-month T-Bills were flat.}

^{2These comparisons are based upon the S&P 500 Value and Growth indices, the Russell 2000 Index, the S&P 500 Index, and the Dow Jones Global Dividends Index. The sector comparisons come from three SPDR sector ETFs: XLE, XLF, and XLK.}

Inflation fears and economic optimism were not as kind to defensive assets. Yields on investment-grade bonds rose substantially this quarter, especially for long-duration government and corporate bonds. Treasurys and investment-grade corporate bonds returned -4% and -5%, respectively. This was the worst quarter for Treasurys since Fed Chair Volcker raised interest rates to new highs in 1980. Gold also fell 10%. On the other hand, returns on high-yield and municipal bonds were relatively flat. In addition, the U.S. dollar climbed 4%, reversing its nine-month decline.3

The Main Themes of the Quarter

A Fundamental Shift in U.S. Economic Policy

The $1.9 trillion stimulus package is expected to boost U.S. economic growth significantly. The stimulus checks inject roughly $400 billion of cash into the economy, and extended unemployment benefits provide additional short-term relief.4 Many economists believe these provisions will be especially effective because they give money to those most likely to spend it. The economic recovery was already underway, with unemployment decreasing to 6.0% in March, and the stimulus will amplify the recovery. The Fed predicts that U.S. GDP will expand by 6.5% in 2021 and unemployment will stand at only 4.5% in Q4.5 Although some critics argue the stimulus is too large, that is preferable to it being too small. Markets indicate higher near-term inflation expectations, with inflation tapering off over time.

The stimulus reflects the Biden administration’s commitment to actively stimulate the economy while reducing inequality. This commitment—paired with the Fed’s new approach of prioritizing maximum employment—may constitute a policy shift as momentous as the transformations that began in 1980 with President Reagan and Fed Chair Volcker. President Biden endeavors to overhaul and expand the safety net for a post-pandemic world unfriendly to less skilled workers. Stimulus checks, the child tax credit, and several other stimulus provisions are highly progressive. Such policies may further facilitate growth, as recent research suggests economic inequality can hamper growth.6

^{3The returns cited are from the ICE U.S. Dollar Index, the Bloomberg Barclays U.S. Treasury Index, and the Bloomberg Barclays U.S. Corporate Bond Index.}

^{4Siegel, Rachel. "What’s in Congress’s $1.9 trillion Covid Bill." The Washington Post, March 10, 2021, https://www.washingtonpost.com/business/2021/03/10/what-is-in-the-stimulus/.}

^{5Federal Open Market Committee. "March 17, 2021: FOMC Projections materials." March 17, 2021, https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20210317.htm.}

^{6Nolan, Brian, Wiemer Salverda, and Timothy Smeeding (editors). The Oxford Handbook of Economic Inequality. Oxford University Press, 2011.}

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