Optimism is in the air. Maybe it’s the warmer weather, COVID-19 vaccine distribution or the resurfacing of social events, but whatever the cause, I’m grateful for the positive outlook this spring – especially compared to the outlook at this time last year.
Q1 2021 Recap
So far, 2021 has been full of surprises – from election results and the storming of the U.S. Capitol to the GameStop trading saga and another massive economic stimulus bill. Macro-and micro-economic activity resulted in increased market volatility in the first quarter, but thanks to declining COVID-19 cases and widespread vaccine distribution, stocks saw solid gains.
Expectations for an accelerated economic recovery pushed Treasury yields higher in March, with the 10-year Treasury yield reaching one-year highs and bond yields rapidly increasing, which contributed to stock market volatility.
Cyclical sectors including energy, financials, industrials, and materials led markets higher in Q1, and anticipated future economic growth had investors rotating out of tech stocks in favor of cyclical sectors.
Q2 2021 Outlook
As we near the end of the COVID-19 pandemic and stimulus resources enter households and businesses, economic growth is anticipated in the months ahead. The macroeconomic outlook for Q2 is positive, although there are always risks to be monitored.
If the pace of rising bond yields accelerates, stock and bond market volatility can be expected as high interest rates are a threat to economic recovery. With massive stimulus fueling the recovery, investors anticipate increases to inflation, but Federal Reserve officials project any increases to be temporary. The Fed has pledged to keep interest rates low and its quantitative easing (QE) program ongoing until the economy returns to pre-pandemic activity levels. However, if inflation increases prove not to be temporary, it will have to remove stimulus via a reduction in the QE program, and that’s not priced into the markets for now.
The Key Takeaway
What a ride we’ve all been on this past year – full of surprises, volatility, challenges, and even some heartache. The start of 2021 demonstrated that a well-executed, diversified financial plan focused on the long term can overcome temporary bouts of volatility, just like it did in 2020. This unusual season illustrated that the markets are resilient – and so are we. As we get back to workplaces, restaurants, and living in community with one another, I hope you continue to cherish the gifts of good health and time with loved ones.