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Market Strategy 4/05/2021

  • John Stoltzfus
  • April 5, 2021

A Tale of Two Asset Classes

Thus far, 2021 has clearly favored equities over government bonds stateside as the US and the world anticipate economic recovery
Key Takeaways
  • The first quarter of 2021 has proven substantially better for equities than for Treasuries as vaccines and improved economic conditions push COVID-19 toward the rear-view mirror of time.
  • The outperformance by equities over fixed income was not a given in the first quarter but was earned as economic resilience and corporate earnings provided support for the case for equities.
  • Last week’s economic data showed consumer confidence hitting record highs and the nonfarm payrolls gain substantially exceeding expectations (with an upward revision to the prior month).
  • Value continues to outperform growth stocks as investors’ appetites grow for broader diversification in investment style as well as capitalization exposure. 

With the first 14 weeks of 2021 in the rearview mirror and progress on the vaccination front well under way, investors will likely increasingly focus on developments on Capitol Hill and the arguments pro and con around the Biden administration’s proposed $2.25 trillion infrastructure spending plan outlined by the President in his public address last week.

So far the bond market’s concerns about the size and cost of the proposed program and the potential risk it poses for higher inflation appear not to be shared by the US equity market even as substantially higher taxes for corporations and higher income earners likely loom.

From the start of the year, Treasury note and bond prices have fallen on inflation fears steadily expressed by the bond market.

  • The yield on the 10 year Treasury (a widely recognized benchmark used by lenders and bond issuers) has risen 82.57% from the start of the year (or from a yield of 0.916% to 1.672%) through last Friday, April 2.
  • The 30 year Treasury yield has risen some 41.79% (or from a yield of 1.646% to 2.334%) over the same period.
  • The 5 year Treasury yield has jumped 149.41% (or from a yield of 0.362% to 0.902%) in the same period. 
Quotation from Aenean Pretium

The challenge in the second quarter will be to keep the mix of positive factors that overwhelmed the negative factors on the economic, social, and corporate landscape in the months ahead.

On the other hand, stocks stateside have moved higher from the start of the year. Investors have reduced their exposure to Treasuries (and other bonds) and sought broader exposure to equities:

  • The Dow Jones Industrial Average is up 8.32% from the start of the year through April 1;
  • The S&P 500 is up 7.02% from the start of the year through April 1;
  • The S&P 400 (mid-caps) is up 14.79% from the start of the year through April 1;
  • The S&P 600 (small-caps) is up 19.78% from the start of the year through April 1;
  • The Russell 2000 (small-caps) is up 14.13% from the start of the year through April 1;
  • The NASDAQ Composite (over 40% weighted in technology or tech related stocks) is up 4.59% from the start of the year through April 1.

(We should note that the price return of these indexes does not include any dividends paid over the periods. Return data also excludes applicable costs, including commissions and interest.)

Given the negative correlation between Treasuries and stocks in the US so far this year, it’s worth noting that equities didn’t always have an easy time of it in the first 14 weeks of 2021. Rather, stocks had to climb a considerable wall of worry made up of COVID-19 risks, troubled logistics in the initial vaccine rollout, virus spikes, viral variants, uneven economic recoveries and re-openings across the US as well as some re-shuttering of segments of economies among a number of states.

The wall of worry is reflected in the respective number of weeks when the major US equity indices moved up and down:

  • The Dow Jones Industrial Average moved higher in 10 of the 14 weeks since the start of the year through April 1.
  • The S&P 500 moved up in 9 of the 14 weeks over the same period.
  • The S&P 400 (mid-caps) moved up in 9 of the 14 weeks over the same period.
  • The S&P600 (small-caps) moved up in 8 of the 14 weeks from the start of the year. The Russell 2000 (small caps) moved up in 7 of the 14 weeks from the start of the year through April 1.
  • The NASDAQ Composite (over 40% weighted in technology or technology-related stocks) moved up in 7 of the 14 weeks from the start of the year.

At the core of what we view as having given equities a clear competitive edge over US Treasury notes and bonds stateside was a potent mix of economic data showing resilience in the American economy, vaccines of efficacy to stem the spread of COVID-19 and a Q4 earnings season which surprised substantially to the upside.

The challenge in the second quarter will be to keep the mix of positive factors that overwhelmed the negative factors on the economic, social and corporate landscape in the months ahead.

Domestic and geopolitical risks in the weeks and months ahead are likely to increasingly present challenges for the markets to navigate stateside and abroad.

John Stoltzfus of Oppenheimer Asset Managment Inc.

John Stoltzfus


Chief Investment Strategist, Oppenheimer Asset Management Inc.

John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.

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