What a difference a year makes! Unlike the situation in the first quarter of 2020, U.S. stocks have posted healthy gains since January. There is optimism that the recent stimulus checks to consumers plus the proposed multi-trillion dollar infrastructure project should inject additional life into the economy. The American economy seems to have weathered its biggest challenge since 2008, and other countries are looking at our bull market with envy.
Just about every investment saw gains in the first quarter. The Wilshire 5000 Total Market Index and the comparable Russell 3000 Index, which are broad measures of U.S. stocks, gained 6.49% and 6.35%, respectively. Large cap stocks have gained over 5% in all three of the main indices: the Wilshire U.S. Large Cap Index, the Russell 1000 Index, and the widely-quoted S&P 500 Index. Meanwhile, the Russell Midcap Index gained 8.14%. Smaller companies as measured by the Wilshire U.S. Small Cap Index rewarded investors with a dramatic 13.53% gain and the comparable Russell 2000 Small-Cap Index posted a 12.70% gain.
International investors also saw gains, although far more modest. The broad-based EAFE Index of companies in developed foreign economies gained 2.83%. In aggregate, European stocks are up 3.52%, while EAFE’s Far East Index was up 1.74%. Emerging market stocks of less developed countries, as represented by the EAFE EM index, gained 1.95% in dollar terms.
Other investment categories also saw growth. Real estate, which is measured by the Wilshire U.S. REIT index, posted an 8.81% gain, and the returns for commodities gained 15.77% based on the S&P GSCI Index. The technology-heavy Nasdaq Composite Index is up 2.78% for the year, as tech stocks finally took a back seat to their peers in other economic sectors.
In the bond markets, the rates on longer-term securities jumped from historically low rates to simply low rates. The coupon rates on 10-year Treasury bonds rose to a 1.67% yield, and the 3 month, 6-month and 12 month bonds are now sporting barely positive yields for the first time since this time last year. The five-year municipal bonds are yielding, on average, 0.50% a year, while 30-year munis are yielding 1.79% on average.
These gains are a big change from this time last year, when stock markets in the U.S. and abroad were reeling from a historically rapid downturn. Today, most analysts believe that the market is overvalued, and many professional investors are cautious. But any move to get out of the markets when this overvaluation became evident would have meant missing huge gains in the markets, proving once again the folly of trying to time the market.
There is more positive news: analysts have increased their earnings estimates for S&P 500 companies by 6.0%—which is a record—and unemployment rates have been trending lower since the start of the year. Finally, the progress of vaccination against COVID appears to be picking up, with some estimating that all adult Americans will be vaccinated in the next couple of months. A return to normalcy could be viewed as another positive sign.
The only dark clouds on the horizon—and these are really gray, not black—is the rise in longer-term interest rates. The U.S. Federal Reserve Board continues to hold down short-term rates to essentially zero, which means several things. First, we have a steepening yield curve, which is often an indicator of economic health. Second, people who invest in longer term bonds are finally getting paid something for their trouble. But higher long-term interest rates make bonds competitive with stocks for investor dollars. This could trigger a shift in investment flows which could lead to lower stock prices.
It is hard to predict whether the markets will continue with the long bullish run. It is not impossible that stocks will eventually return to more normal valuations—suggesting prices at least 30% lower than they are today. That could happen gradually as companies boost their earnings while market returns go back down to single digits. The sudden, unpredicted appearance of the pandemic shows us how little we know about what is to come.
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Indices mentioned are unmanaged and cannot be invested into directly.
Wilshire index data: https://www.wilshire.com/indexcalculator/index.html
Russell index data: http://www.ftse.com/products/indices/russell-us
Nasdaq index data:
International indices: https://www.msci.com/end-of-day-data-search
Commodities index data: https://us.spindices.com/indices/commodities/sp-gsci
Treasury market rates: https://www.bloomberg.com/markets/rates-bonds