Global Equity

U.S. equity indices delivered mostly positive results (Russell MidCap Growth was the lone exception with a 0.6% loss). The S&P 500 Index (+6.2%) was led by Energy (+30.9%) and Financials (+16.0%), while Information Technology (+2.0%) and Consumer Staples (+1.1%) lagged. In a departure from previous quarters, value sharply outperformed growth across the capitalization spectrum. Value stocks have underperformed growth since the market peak in February 2020, but the gap has narrowed significantly. Small cap stocks sharply outperformed large cap during the quarter, benefiting from less exposure to the Technology sector as well as strong performance from Retail. Certain sectors have experienced sharp double-digit increases in recent months as vaccine-induced optimism has fueled a rebound. Data from JP Morgan shows that from Nov. 6, 2020 (reflecting the last business day before it was announced that a vaccine candidate had better than 90% efficacy against COVID-19), airlines, energy, retail REITs, and cruise lines/hotels/resorts have soared more than 50%.

Global ex-U.S. indices posted positive results but generally lagged the U.S., due largely to U.S. dollar strength. The MSCI ACWI ex-USA Index gained 3.5% but was up 6.5% in local currency terms. The greenback gained more than 6% vs. the yen and nearly 4% vs. the euro over the quarter on bright prospects for economic growth in the U.S. and rising interest rates. The U.K. (+6.2%) delivered relatively strong results while Europe (+3.5%) and Japan (+1.6%) lagged.

As in the U.S., small cap stocks outperformed large; value outperformed growth; and Financials did especially well. Emerging markets lagged developed markets; the MSCI Emerging Markets Index gained 2.3% and 4.0% in local terms. China (-0.4%) and Brazil (-10%) were laggards as President Xi intensified regulation of China’s tech sector, pressuring share prices, and Brazil struggled to contain COVID-19. Taiwan (+10.9%) was a top performer, and the country is up more than 90% over the last 12 months, boosted by its heavy weighting in and strong performance from Technology stocks. In contrast, South Korea posted a muted 1.6% gain.

Global Fixed Income

Concerns over future inflation drove the 10-year U.S. Treasury yield to an intraday high of 1.77% in March, a 15-month high, before closing the quarter at 1.74%, up from 0.93% at year-end. The Bloomberg Barclays US Treasury Index fell 4.1%, and the long-term US Treasury Index (-13.5%) suffered its harshest decline since 1980. TIPS (-1.5%), outperformed nominal Treasuries as 10-year breakeven spreads widened from 1.99% at year-end to 2.37% as of March 31. The Bloomberg Barclays US Aggregate Bond Index fell 3.4%, with spread sectors outperforming Treasuries and lower quality faring the best. High yield corporates posted a 0.9% gain, as measured by Bloomberg Barclays, amid a record-making spate of issuance. The CCC-rated sector gained 3.6%, benefiting from risk-on sentiment, rising stock markets, and the recovery of some COVID-19 victims (airlines, retail, energy). Bank loans, which have floating rate coupons and a relatively short duration, gained 1.8% (S&P LSTA). Municipals outperformed U.S. Treasuries against a favorable supply/demand backdrop. In addition, the market was supported by the $350 billion allocated to support state and local governments in the recent stimulus package.

Rates also rose overseas and a strengthening U.S. dollar further eroded foreign bond returns for U.S. investors. The Bloomberg Barclays Global Aggregate ex-US Bond Index fell 5.3% (-1.9% hedged). The dollar gained nearly 4% versus a basket of currencies, with the Japanese yen and Swiss franc both suffering their worst quarter in years. Emerging market debt returns were also negative. The JP Morgan EMBI Global Diversified fell 4.5% and the local currency JP Morgan GBI-EM Global Diversified sank 6.7%.

Real Assets

Real assets posted strong returns in 1Q on prospects for a robust recovery as well as a potential hedge against coming inflation. Brent Crude oil (+22%) closed at nearly $60/barrel, up over 90% from March 31, 2020. The S&P GSCI Index soared 13.6% with copper (+13%) being a big gainer. REITs, as measured by the Dow Jones U.S. Select REIT Index, rose 10%. Gold (-11.3%) was an outlier, falling in price as bond yields rose. The Bloomberg Barclays 1-10 Yr. US TIPS Index posted a muted 0.6% result, but outperformed nominal U.S. Treasuries as inflation expectations rose.