While we were all glad to put 2020 behind us, 2021 has proven to be full of surprises as well. By the end of the quarter, we found ourselves in a much different place than we did at the end of 2020. The major trend changes experienced during the first quarter were the main drivers for financial markets.

Here are the top 3 trend changes seen in the first quarter:

1. Market Movers

Financial markets were forced to digest political strife, the ongoing pandemic, rising interest rates, fears of inflation, and unstable hedge funds all in the first three months of 2021. While these issues added to volatility and pulled at the market, fiscal stimulus and the vaccine rollout have thus far exceeded expectations, allowing investors to look to the future with growing optimism. The S&P 500 (+6.2%) and all eleven sectors rose during the quarter.

2. Asset Rotation

In the middle of the quarter, we saw a rotation from 2020 themes, or “stay at home” stocks, to “reopening” stocks. This meant that the Technology sector and growth-related assets gave way to sectors such as Industrials and Financials, as well as more value-related strategies.

3. Interest Rates

Prior to 2021, interest rates had stayed at historically low levels. As rates started to go higher this quarter, fixed income assets (especially those with longer maturities) struggled. The Bloomberg Aggregate Bond Index even posted its first negative quarterly return in more than two years.

Perhaps, some of the biggest trend changes are yet to come. With money from the most recently passed stimulus bill now entering pockets of individuals and businesses, this should be able to help spur the economy. In addition, it is becoming more and more possible that we will see the end of widespread restrictions by the end of the year as the number of vaccinated Americans continues to grow, further boosting the economy.

A Closer Look on Inflation

While the economy is booming and there is improvement across multiple economic indicators (to historically high levels), investors are becoming more worried about accelerating inflation. The Federal Reserve has pledged numerous times in recent months to continue to keep short-term interest rates low and its quantitative easing (QE) program ongoing until the economy returns to pre-pandemic activity levels.

Unsurprisingly, the multiple rounds of stimulus that have been unleashed upon the economy since the pandemic began have resulted in substantial increases to the national debt and federal deficits, and the recently passed stimulus bill only exacerbated those existing issues.

For now, we believe we are starting to see inflation tick higher for the right reasons, because the economy is growing. Further, Federal Reserve officials expect any increase in inflation to be temporary, which aligns with our economic forecast that suggests inflationary pressures should recede in the second half of the year.

Inflation is too much money chasing too few goods. Looking at the data, the 27% growth in the M2 money supply (amount of money or cash in our economy) represents an extremely high level of potential demand. Combined with reports of supply chain problems and issues meeting demand, we could see inflation run hot.

So far in 2021 markets have embraced the Democratic agenda of more economic stimulus. But numerous prominent Democrats are also in favor of increased corporate, personal and investment taxes, and if those efforts gain momentum, output could be further hampered, potentially fueling higher inflation and market volatility. As a result, we will be keeping a close eye on inflation gauges and the market implications.

Outlook: Bullish

The reflationary story here is as straightforward as ever: vaccinations and a return to normal economic activity will create a multi-month stretch of large-scale hiring. The coinciding boost in consumption may be further amplified by the deployment of excess personal savings as well as ongoing stimulus support. The outlook for the economy in the second quarter remains bright.

How We Can Help

At GGM, aligning your investments with the prevailing economic environment is just one of the ways we strive to add value to your portfolio. If you are concerned about whether your investments are primed for the current market and allocated to meet your objectives, we recommend our complimentary portfolio checkup. Contact us today!