In this latest installment of our quarterly newsletter, we share our observations on the first quarter of 2021 and our outlook for the remainder of the year. Click here to go to the full report on our website. Following are highlights:
- Stocks continued rising through the first quarter of 2021, maintaining momentum despite the ongoing pandemic, political and social unrest, and rising interest rates.
- Following an 18.3% surge in 2020, the S&P 500 index gained another 6.2%, including dividends, in the first three months of 2021.
- Investors found encouragement in the accelerating pace of vaccinations and expectations of a strong economic recovery this year, partly fueled by the promise of trillions of dollars in relief from the U.S. government and ongoing support from the Federal Reserve.
- Market leadership shifted from technology firms that mostly thrived during the pandemic to sectors that will likely benefit most from the economic rebound, including energy, financials, and industrials. Small stocks, which are generally more affected by economic swings, also rose sharply.
- Largely due to concerns about inflation that might result from the influx of relief dollars and a rebounding economy, interest rates rose sharply, with the yield on the 10-Year Treasury almost doubling from 0.9% at the beginning of January to over 1.7% at the end of March.
- The Fed did its part to try to alleviate fears of inflation by maintaining its commitment to bond purchases and the low federal funds rate.
- Amidst an improving economy and increased business activity, corporate earnings rose. Companies will report first quarter results soon, and analysts’ estimates of first quarter corporate earnings have increased to a growth rate of about 24%.
- We are optimistic that the U.S. economy is poised for a sharp rebound later this year as more people get vaccinated and return to travel, entertainment, dining out, and other activities curtailed by the pandemic for the past year.
- As for additional support from the government, we are hopeful that Congress will approve a significant amount of infrastructure spending, though the final result will probably be smaller and narrower than the Biden administration’s $2 trillion initial proposal.
- Analysts predict GDP growth of 7% or more for this year, which would be the highest rate since the 1980s.
- Finally, we believe the earnings outlook for companies is positive and stock valuations are reasonable given still-low interest rates and expectations of an economic rebound.
The Edgemoor Team
