Monday, April 19th, 2021
The first quarter of 2021 is officially in the books and all three major US large cap indices – the S&P 500, Nasdaq Composite, and the Dow Jones Industrial Average – finished the quarter in positive territory. In a juxtaposition of leadership from 2020, it was the Dow leading the way with a gain of 7.76%, while the Nasdaq lagged, returning 2.78%, and SPX finished in the middle, up 5.77%. However, as in the prior quarter, small caps once again outpaced large caps as the Russell 2000 Index gained more than 12%.
While the first quarter was not particularly volatile, especially compared with the same time last year, there was quite a bit of shuffling, nonetheless. After leading the domestic equity relative strength rankings in our Dynamic Asset Level Investing (DALI) tool almost continuously for three-plus years, the technology sector surrendered its leadership and fell to fifth. DALI provides us with a heat map of where relative strength (and weakness) resides across and within asset classes. On the other hand, financials and energy climbed from near the bottom of the DALI sector rankings all the way to their current positions in the top three.
After underperforming for much of the last several years, value came back into favor, significantly outperforming growth in both the large and small cap categories. Meanwhile, following a fairly steady ascent in the final months of 2020, US Treasury yields accelerated dramatically in early 2021. The US Treasury 10-year Yield Index reached 1.75% in March after starting the quarter at under 1%, resulting in a challenging environment for long-dated US Treasuries and investment grade corporate bonds, which had been among the strongest areas of the fixed income market in 2020.
As the second quarter begins, the DALI asset class rankings favor equities with domestic equities and international equities occupying the top two spots. Many analysts have predicted strong domestic economic growth in 2021 thanks to accommodative fiscal and monetary policy, which would be a constructive environment for US equities. The domestic equity sector rankings point to an offensive or risk-on positioning in the market as the consumer cyclicals and energy sectors lead the rankings while the traditionally defensive consumer non-cyclical and utilities sectors sit at the bottom. We continue to monitor closely for any shifts in the market landscape.
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