The first quarter of 2021 was another strong quarter for the S&P 500, posting a 6.17% total return in the midst of our continuing worldwide coronavirus pandemic. This marks three straight quarters of strong performance in the broad-based markets, as the world economy has begun to recover from the COVID-19 outbreak.
Q1 2021 S&P 500 Price Movement
Performance by Investment Style and Market Capitalization
As you can see in the chart to the above, large-cap value outperformed large-cap growth at levels we haven’t seen since the dot-com bubble burst in the early 2000s. Historically, value has outperformed growth approximately 60% of the time, while taking less risk in the process. Again, the adjacent chart above illustrates that we’ve been in a growth market for several years. Many market pundits, including those of us here at Polaris Wealth, believe that we are moving into a time period where value will outperform growth most quarters, for several years to come.
Russell 1000 Growth minus Russell 1000 Value
Quarterly Percentage Change (2021-03-31 = -9.92)
Asset Class Benchmark Performance
U.S. Consumer Price Index – February 1914 to February 2021
Global Market Performance Ranking
While the first quarter of 2021 was a strong quarter for stocks, it wasn’t all good for the bond market. In fact, it was one of the worst quarters on record, going back over 100 years. As you can see from the chart on the right, the 30-year treasury had its worst quarter since Q1 1980, down 13.5% in just three months.
Shorter duration bonds weren’t down nearly as much, but the U.S. Aggregate Bond Index was down 3.6%, while U.S. corporate bonds were down 4.6%.
U.S. 30-Year Treasury Quarterly Returns 1/1/1927 - 3/31/2021
S&P Composite Index –
Log scale, annual
This is why we are so adamant about getting clients off the sidelines and getting their money working for them. You must “make hay while the sun shines.” And you must ignore the static knowing that “bull markets climb a wall of worry.” If this is indeed an average secular bull market, then we are just past the midway point. What if it’s a longer than average secular bull market? Do you want to be invested and take advantage of the rest of this secular bull market, or do you want to allow yourself to get frightened out of the market by the media, a newsletter, a friend that knows more about the markets than you, a gut feeling… ?
The Rest of 2021
So, what’s in store for the rest of the year? The advice is really not any different than the advice given three or six months ago. But let me reiterate some of what we’ve been talking about for months.
It’s All About COVID
It’s pretty straightforward. COVID-19 shut down the world’s economy. Getting vaccines in arms and getting herd immunity is the path back to life as we knew it prior to our worldwide pandemic. It’s why we track daily new cases, not only in the U.S. but throughout the world.
COVID-19 - U.S. Daily New Cases
Cases per day, data as of 0:00 GMT+0
As we all know, when the number of cases rises, it taxes the medical systems in the cities, states, regions, or countries. The unfortunate result is a higher death rate. While we are seeing a dramatic drop off of daily new cases and death rate in the United States, unfortunately, the worldwide numbers for daily new cases and death rates are on the rise, something we are monitoring closely.
COVID-19 - U.S. Daily Deaths
Deaths per day, data as of 0:00 GMT+8
People with at Least One Dose
of COVID-19 Vaccine
The Path to Herd Immunity -
Total Immunity Estimates
S&P 500 Earnings per Share
Index annual operating earnings
We expect that the stimulus will drive corporate earnings in 2021 to levels above pre-pandemic levels, and we believe that as the U.S. economy fully opens up, pent up demand will continue this growth in earnings to higher levels in 2022.
High-Frequency Economic Activity
Year-over-year % change; Year-over-2 year after 3/15/21*
Tracking unemployment and wage growth are two other indicators that help us understand the future health of our economy. Tracking unemployment figures is pretty straightforward. If someone is without a job, they are going to only spend money on food and housing, with virtually no discretionary spending. Wage growth is especially important to understand. For those working, are they making more or less than the year before? Higher wage growth leads to higher discretionary spending.
We have seen unemployment steadily improve from its April 2020 highs of 14.8%. February’s 6.2% is a vast improvement, but still far above the sub 4% levels we were at prior to this global pandemic. Interestingly, wage growth has also gone up, which is typically not the case when unemployment increases. This is due to the stimulus checks many Americans received.
Civilian Unemployment Rate and Year-Over-Year Wage Growth for
Private Production and Non-Supervisory Workers
Seasonally adjusted, percent
Large-Cap Stock Valuation by Dividend Policy
Monthly 10/31/1980 - 3/31/2022 (Log Scale)
Historical U.S. Treasury Yield Curves
Nominal and Real U.S. 10-Year Treasury Yields
1/1/1958 - 3/31/2021 (Log Scale)
Polaris Wealth did an incredible job identifying and investing in the correct parts of the market during the first quarter of 2021, as is reflected in your statements. We don’t think that value will outperform at the same levels that we experienced in the first quarter, but we do believe that the best opportunities are still found in this space. As a tactical investment management firm, we will continuously monitor the markets for their strengths and weaknesses and invest accordingly. We believe that the first quarter is the beginning of a value trend in the markets that could last for years.
While Polaris Wealth feels strongly about what we have written, we are never married to any belief. We will remain vigilant in evaluating the risks in the markets to determine if we need to get defensive for any reason. We feel very strongly that once we start seeing a material drop off of COVID cases in the United States, you will see investors getting aggressive about their investments in equities. The key is to be invested before these “late to the game” investors start pushing up the values in the “recovery” names that are driving the current markets. I’ll leave you with one last thought… The last worldwide pandemic we had began in 1918 and lasted until 1919. What happened after this pandemic? That’s right, the “Roaring 20s!” There is a lot of pent up demand that is not being actualized due to COVID. What do you think happens once the vaccine is fully rolled out?