Kevin Barr, Head of SEI's Investment Management Unit, provides an overview of the global financial markets and our perspective on them.
Watch: Q1 2021 Quarterly Investment Review
I'm Kevin Barr, Head of SEI's Investment Management Unit. Over the next few minutes I will provide an overview of the global financial markets and our perspective on them.
To begin, I'm pleased to note that as we mark the one-year anniversary of working remotely, the world is in a much better place. We have greater certainty regarding COVID-19 and we've seen shifts in the stock market that reflect broader market participation beyond the small number of large tech companies that had been dominating the news.
Accordingly, major stock indexes delivered strong returns for the quarter in the U.S. and globally, although not quite to the levels we’ve seen over the last few quarters. I think everyone will agree it’s a much better way to start the year than the first quarter of 2020.
But it was not a straight path. Stocks were shaken in late January by internet-driven speculators who banded together to temporarily drive up prices of a handful of out-of-favor companies. Their actions created a notable bout of volatility. We also saw a significant shakeout in mid-February as bond yields jumped. The selloff was harder on international stocks as the strength of the U.S. dollar began to climb relative to other currencies.
Looking at sector-specific performance, the fourth-quarter’s leaders…energy and financials…were also the best-performing U.S. sectors in the first quarter.
This pattern also held among global sectors, although performance was a bit more subdued across the board.
After leading for two consecutive quarters, it’s reasonable to wonder if energy and financials are still relative bargains today.
So let’s look at price-to-earnings ratios across S&P 500 sectors using 2021 earnings estimates. We can see financials and health care remained the most attractively valued sectors from the beginning to the end of the first quarter based on this measure. Most sectors grew a bit more expensive, but energy got cheaper despite its 30% price increase, indicating just how sharply its earnings prospects have improved.
Accordingly, we believe there remains an opportunity to benefit from investing in value stocks despite their recent gains.
Moving on to the fixed-income market, vaccine production and distribution are helping investors anticipate a return to a more normal world. This is reflected in the rapid rise in bond yields…which has been the most important change in the financial environment so far this year.
Yields can increase for a variety of reasons. Higher economic growth, rising inflation pressures and a heavy supply of government bonds all contribute in different ways. It’s not a straightforward cause-and-effect issue, but more of a reflection that each of these dynamics has been shifting.
The closely watched yield on the 10-year US Treasury bond nearly doubled during the period as interest rates climbed faster and further than anyone expected. While the U.S. set the pace, rates rose in other countries as well.
Because bonds yields and prices move in opposite directions, rapidly rising interest rates caused outsized price drops, particularly in long-term fixed-income securities.
We can see the toll it took across the fixed-income universe during the first quarter. Only U.S. high-yield bonds delivered notably positive performance, while inflation-protected securities were essentially flat. Local-currency-denominated emerging market¬ debt, last quarter’s top performer, had the steepest decline for the quarter.
As we saw in February, higher bond yields can lead to stock market volatility, but we do not expect them to derail the bull market. We believe value-oriented shares and companies with greater sensitivity to economic cycles will continue to advance relative to growth and defensively oriented sectors. In most cases, value shares outperform growth when interest rates are rising or long-term rates are significantly higher than short-term rates.
We will be watching whether the U.S. Federal Reserve can maintain its stance of a near-zero federal funds rate through 2023. At the present time, we don’t view inflation as a significant concern, but an acceleration in inflation could force the Fed’s hand.
Beyond COVID concerns like the spread of variants and the pace of vaccinations, investors will be increasingly focused on the Biden administration’s proposed multi-trillion dollar U.S. infrastructure package. Tax increases on corporations and high-income households will also be part of this package. With that in mind, we caution against making broad asset-allocation changes based on perceived shifts in political winds.
On behalf of everyone at SEI, thank you, as always for your trust and confidence.
Glossary of Financial Terms
10 Year U.S. Treasury rate: The 10-year U.S. Treasury rate is the interest rate, or yield, paid to owners of the 10-year U.S. Treasury note at its current price (fixed-income yields and prices have an inverse relationship).
Bull market: A bull market refers to a market environment in which prices are generally rising (or are expected to rise) and investor confidence is high.
Inflation-protected securities: Inflation-protected securities provide investors with protection against inflation. The principal of an inflation-protected security typically increases with inflation and decreases with deflation.
Price-to-earnings (PE) ratio: The PE ratio is equal to the market capitalization of a share or index divided by trailing (over the prior 12 months) or forward (forecasted over the next 12 months) earnings. The higher the PE ratio, the more the market is willing to pay for each dollar of annual earnings.
Value: Value stocks are those that are considered to be cheap and are trading for less than they are worth.
Yield: Yield is a general term for the expected return, in percentage or basis points (one basis point is 0.01%), of a fixed-income investment.
Bloomberg Barclays 1-10 Year US TIPS Index: The Bloomberg Barclays 1-10 Year US TIPS Index measures the performance of inflation-protected public obligations of the U.S. Treasury that have a remaining maturity of 1 to 10 years.
Bloomberg Barclays U.S. Corporate Bond Index: The Bloomberg Barclays U.S. Corporate Investment Grade Index is a broad-based benchmark that measures the investment-grade, fixed-rate, taxable corporate bond market.
Bloomberg Barclays U.S. Treasury Index: The Bloomberg Barclays U.S. Treasury Index is an unmanaged index composed of U.S. Treasurys.
ICE BofA U.S. High Yield Constrained Index: The ICE BofA U.S. High Yield Constrained Index tracks the performance of below-investment-grade, U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market and caps exposure to individual issuers at 2%.
JPMorgan EMBI Global Diversified Index: The JPMorgan EMBI Global Diversified Index tracks the performance of external debt instruments (including U.S. dollar-denominated and other external-currency-denominated Brady bonds, loans, eurobonds and local-market instruments) in the emerging markets.
JPMorgan GBI-EM Global Diversified Index: The JPMorgan GBI-EM Global Diversified Index tracks the performance of debt instruments issued in domestic currencies by emerging-market governments.
MSCI ACWI Index: The MSCI ACWI Index is a market capitalization weighted index composed of over 2,800 companies, and is representative of the market structure of 49 developed and emerging market countries in North and South America, Europe, Africa, and the Pacific Rim. The index is calculated with net dividends reinvested in U.S. dollars.
S&P 500 Index: The S&P 500 Index is an unmanaged, market-capitalization weighted index that consists of the 500 largest publicly traded U.S. companies and is considered representative of the broad U.S. stock market
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