The frenzied behavior of financial markets that characterized 2020 showed no signs of letting up in the first quarter of 2021. In addition to the strong gains posted by many U.S. stocks (and more muted gains by technology stocks), headlines were dominated by dramatic price swings in “meme stocks” such as GameStop and spectacular losses by high-profile investment firms such as Melvin Capital. Over the course of the quarter, markets digested a trove of events and signals, from the shifting political landscape in the U.S. marked by a swap in control of the U.S. Senate to the current state of the ongoing pandemic and expectations about the future success of vaccination campaigns around the world.
During the first quarter, investors seemed to demonstrate that the supply of risk takers is as strong as ever. At SigFig, we recommend investors take an approach to risk that aligns with their financial goals and time horizons, and that remains steadfast in the face of short-term market noise. That said, it is still important to keep up-to-date on what is happening in spheres that could affect your portfolio, so here we highlight some first quarter events and trends in financial markets for long-term investors to keep their eyes on.
Major U.S. indices continued their run of positive performance in the first quarter. Investors appeared to view positive progress on vaccination campaigns in the U.S. as a signal that the pandemic is winding down and that full-steam economic activity is on the horizon, despite the threat of more contagious COVID-19 variants spreading rapidly. One example of positive news that the economy has started to pick up steam was the first quarter addition of ~1.3 million jobs, most of which came in March (916,000 jobs added).1
The Dow Jones Industrial Average gained 7.8%, the S&P 500 was up 5.8%, and the tech-heavy NASDAQ rose 2.8% (which includes a 1.54% gain on the last trading day of the quarter2). A sector-level view of U.S. stock performance, however, reveals an interesting phenomena of investors moving money into financial and energy companies at a more pronounced rate compared to technology and consumer staples (e.g. Procter & Gamble, Costco, Coca-Cola) that fared better in the 2020 environment of repeated pandemic lockdowns. The chart below shows the daily year-to-date (YTD) performance of four ETFs, each tracking the performance of the specific sectors mentioned above: energy, financials, technology, and consumer staples.3 While technology and consumer staple companies posted positive movement for the quarter, those returns were eclipsed by eye-popping gains in the financial (+16% Q1 return, +81% annualized) and energy (30.8% Q1 return, +293% annualized) sectors.
While the exact motives of markets are hard to precisely define, investors appear to be making a bet that the improving economic circumstances in the U.S. will benefit the energy and financial sectors, which lagged in 2020. Although interesting as a market trend, SigFig’s investment strategy does not incorporate trends in domestic sectors deemed “hot” or not, and instead takes a capitalization-weighted approach (i.e., buy all U.S. stocks proportionally based on their relative market capitalizations/weights).
Aggregate stock markets from around the world performed similarly to those in the U.S, despite the emergence of a “third-wave” of COVID-19 infections and early vaccination stumbles in Europe. The iShares Core MSCI EAFE-indexed ETF (IEFA), which aims to represent large and mid-cap companies across developed markets outside of the U.S. and Canada, was up 4.3% for the quarter and iShares Core MSCI Emerging Market-indexed ETF (IEMG), which aims to represent large and mid-cap companies across emerging markets around the world, gained 3.7%.
Whether you consider yourself an attentive market watcher or a casual observer, it is likely that at some point in the last three months you have heard the word “GameStop.” Why? Because in Q1 shares of the video game retailer became the quintessential example of a meme stock, or “a stock that saw an increase in volume not because of the company’s performance, but rather because of hype on social media and online forums like Reddit.”4
The short version of the story is that in mid-January, the stock price of GameStop (GME) began to rise at a rate so astonishing it captured the attention of media outlets, financial firms, and the general population around the world. Almost a year ago, in March 2020, GME traded at a price of ~$4/share. Its share price would rise to $18.84 by the end of 2020, an approximate +350% return over a 10-month period. Then things really took off. Over a three week span covering mid and late January, GME traded as high as $483/share (Jan 28, +2,464% YTD performance). One major consequence of the GME price rise is that hedge funds that had bet that GME’s price would decrease (also known as short-selling) suffered substantial losses; the investment firm Melvin Capital suffered a 53% loss in the firm’s investment fund from its GME short position.5
It is important to note that at SigFig we encourage an investing approach of broad diversification across global asset classes and steady, long-term decision making, oriented around your goals and tolerance for risk. We do not encourage market timing or speculative trading of individual securities. Instead, SigFig’s trading algorithm is designed to handle dividends and cash deposits by investing into asset classes that are underweight relative to their target value and, if a withdrawal is requested, liquidating asset classes that are overweight relative to their targets.
Democrats’ surprise sweep of Georgia’s Senate runoff races in early January gave them control of the Senate majority and the federal government passed a $1.9 trillion stimulus package promoted by the Biden administration. Included in the bill was a fresh round of direct payments to individuals and families, albeit with stricter income requirements than the two preceding pandemic-related payments of 2020. The injection of cash is expected to stoke economic activity and raised questions about the likelihood of increased inflation. While the Federal Reserve predicts some inflation as demand for many goods and services outpaces supply, Federal Reserve Chairman Jerome Powell consistently says they expect long-term, average inflation to stay around the 2% target level.6
At a recent meeting of the Federal Open Market Committee and Board of Governors in mid-March, the Federal Reserve indicated that positive movements in the labor market and economic activity indicators were encouraging, but indicated that their policies of near-zero interest rates and substantial bond purchases ($80 billion/month U.S. Treasuries, $40 billion/month mortgage-backed securities) would continue until “substantial further progress” is made toward the goals of maximum employment and price stability.7
Additionally, the meeting addressed the recent leap in Treasury yields, specifically the 10-year rate that rose from 0.9% at the end of 2020 to 1.7% at the end of Q1 2021.8 While the committee agreed that the rise in yields reflected an improving economic outlook, it noted that continued increases in Treasury yields could jeopardize the progress of the Committee’s employment and price-stability goals and would be a cause for concern. It is important for investors to remember that bond yields and prices are inversely related, meaning that, all else equal, as yields rise the value of bonds purchased at lower yields decreases. It remains unclear whether Treasury yields will continue to rise or retain the relatively low and stable levels observed over the last few years. Therefore, it is essential that long-term investors hold a diversified set of fixed income holdings in our view, which is why SigFig portfolios have broad exposure to short, intermediate, and long-term duration bonds from government and corporate issuers.
While Q1 proved to be eventful (looking at you “meme stocks”), there continues to be optimism as the world works toward herd immunity. At SigFig, we encourage clients to keep up-to-date on market shifts and routinely evaluate your financial goals, but discourage trying to time the market, especially for long-term investors. If you have questions about your investment options or what asset allocation is appropriate for you based on your goals, take our risk questionnaire. SigFig has financial advisors ready to discuss your unique situation and offers broadly-diversified managed portfolios that can help you on your financial journey. If you are interested in speaking with a SigFig financial advisor, schedule an appointment today, or become a SigFig managed account customer directly via our website.
3 Data provided by Yahoo! Finance.
5 See “Melvin Capital Lost 53% in January, Hurt by GameStop and Other Bets” The Wall Street Journal.
6 See “Fed in March saw brighter outlook, yet underscored patience” AP News.
This communication is issued by SigFig Wealth Management LLC (“SigFig”), an investment adviser registered with the Securities and Exchange Commission.
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