The U.S. economy expanded in the final quarter of 2020 (the most recent data available) at a 4.3% annual pace. This expansion concluded a turbulent year with huge swings in GDP as the economy contracted at an annualized rate of 3.5% in 2020. The advanced estimate of Q1 GDP will be released on April 29. Faster growth is expected with more people getting vaccinated and pandemic relief being distributed. President Biden signed into law the latest coronavirus relief bill worth $1.9 trillion on March 11. Lawmakers have provided relief totaling $5.3 trillion thus far to help manage the pandemic and mitigate the economic burden on families and businesses. Biden’s next priority is a $2 trillion infrastructure and jobs plan.
Nonfarm payrolls rose by 916,000 in March as the unemployment rate declined to 6.0%. Though the economy has recovered more than 13 million jobs since the depths of the crisis, about 9 million more jobs remain sidelined. Consumer confidence soared in March. Retail sales jumped 9.8%. Consumer spending, which makes up over two-thirds of the economy, fell 1% in February as severe winter storms disrupted shopping in many parts of the country. It is expected to rebound strongly in March. Manufacturing data reached its highest level since December 1983. The Institute for Supply Management (ISM) reported that its index of national factory activity jumped to a reading of 64.7 in March, up sharply from a month earlier. (A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the U.S. economy.) CPI rose 0.6% in March from the previous month and 2.6% from a year ago. A surge in gasoline prices accounted for about half the gain amid signs of an accelerating economic recovery. Core CPI, which excludes volatile food and energy costs, increased more modestly at 1.6% (year over year) through March. There are concerns that pent-up consumer demand and stimulus spending will overheat the economy and trigger runaway inflation. However, many economists and the Federal Reserve expect increased inflationary pressures to be temporary at this time.
The yield curve steepened during Q1. The yield on the 10-year Treasury note ended at 1.74%, up 81 basis points from year-end, continuing its recovery from record low levels during the 2020 recession. The 30-year Treasury bond yielded 2.41% at quarter-end. High yield bonds and 3-month Treasury bills reported the best quarterly fixed income returns, up 1.05% & 0.01%, respectively. All other fixed income sectors reported negative absolute returns. The Bloomberg Barclays U.S. Aggregate Bond Index fell 3.4% in the quarter. The index mainly consists of U.S. Treasuries, Agencies, and investment-grade corporate bonds, which struggled. Developed international bonds had the lowest return, declining 6.4%, followed by emerging market bonds (down 4.7%). Fed Chairman Jerome Powell stated in April that it is highly unlikely the Fed will raise rates this year despite the strong economy. It will do everything it can to support the economy for as long as it takes to complete the recovery - anchoring short-term rates near zero and purchasing $120 billion of bonds each month.
The S&P 500 ended the quarter with a gain of 6.2%. While growth stocks stalled, the market rotated to value pushing the S&P 500 higher. Small-cap stocks also rallied. Value stocks outperformed small-, mid-, and large-cap growth categories with small-cap value stocks jumping 21.2% in the quarter. Energy and financials were the strongest sectors as economically-sensitive cyclical companies thrived. Consumer staples and technology were the weakest. The forward P/E for the S&P 500 ended the quarter at 21.9x, above the 25-year average of 16.6x. The index's ten largest stocks traded much higher at 30.1x. Corporate earnings are expected to continue to rebound in 2021, helping to justify record stock prices.
Non-U.S. equities added to stock market gains, but leadership shifted away from emerging markets. The MSCI EAFE and the MSCI World ex-USA Index (both include developed countries only) gained 3.6% and 4.2%, while EM equities increased 2.3%. UK stocks rebounded 6.2% as the country finalized its departure from the EU in January 2021. Latin America posted weak returns; Emerging Asia increased 2.2%.
The Bloomberg Commodity Index rose by nearly 7% in the quarter with rising crude oil and agriculture prices. Oil prices jumped by 22% as global demand continued to recover. Gold prices declined after a strong 2020 given safe haven demand during the pandemic. REITs improved by 8.5% in Q1, helped by an improving economic outlook.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.