2021 Q1 Market Summary and Outlook

Global equities moved higher during Q1. The S&P 500, Dow Jones Industrial Average, Nasdaq Composite and Canada’s S&P/TSX Composite all climbed to record highs

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Global equities moved higher during Q1. The S&P 500, Dow Jones Industrial Average, Nasdaq Composite and Canada’s S&P/TSX Composite all climbed to record highs. International equities, as measured by the MSCI EAFE Index, moved to a new all-time high in Canadian dollar terms. The advance was fuelled by optimism surrounding the continuing vaccine roll-out, the significant U.S. fiscal stimulus package, and earnings that beat expectations. Investors shook off the overrunning of the U.S. Capitol Building by protestors in January, but a pullback took hold that was triggered by a short squeeze on hedge fund positions. Another retreat occurred in February as rising bond yields raised concerns about inflation and the risk to corporate profitability and equity valuations. Each retreat was followed by a rapid move to new highs. The passage of U.S. President Joe Biden’s $1.9T stimulus bill fuelled both optimism for growth and concern about its inflationary impact.

Higher oil prices helped boost the Canadian dollar above US$0.80 for the first time since 2018, which lowered returns from international investments for Canadian investors. The relative performance of value, cyclical and small-capitalization stocks compared to growth, defensive and large-capitalization stocks continued. The health care sector led gains in the TSX as cannabis companies rose. The energy sector was higher as confidence in rebounding activity boosted the price of oil. The financials sector was also strong, benefitting from rising yields and steepening yield curves and stronger-than-expected earnings reports from the major banks. The materials sector led on the downside, driven by the retreat in gold prices. The defensive utilities and consumer staples sectors underperformed, victims of rising confidence and bond yields. The information technology sector underperformed. Fast-growing tech companies are especially sensitive to inflation pressures because most of their value derives from future earnings.

All major EAFE markets finished higher. Germany’s DAX index reached a record high. Stocks in London lagged following reports that the Bank of England discussed the prospects of needing negative interest rates to support the economy. Spanish stocks, which are sensitive to the travel and tourism industry, underperformed in reaction to tightened COVID-19 restrictions. Asia-Pacific underperformed Europe and North America. Japan led the Asia-Pacific region with the Nikkei 225 index rallying to its highest level since 1990.

Most fixed-income markets lost ground. Bond prices fell as yields pushed higher around the globe, reflecting rising expectations of inflationary pressures because of economic recovery. All the major central banks kept their benchmark rates near or below zero, resulting in rapidly steepening yield curves as yields climbed on long-term bonds. Because long-term bonds are more sensitive to interest-rate changes, long-term bonds significantly underperformed short-term bonds. Bonds in North America underperformed international bonds. North American yields climbed more than those in Europe and Asia due to the expectation of stronger economic growth in the U.S. Bonds in Japan, where yields increased the least, outperformed other developed markets.

The coming quarters continue to look extraordinarily bullish for equity investors. As vaccines roll out, the global economy is beginning to experience a broad, synchronized recovery. Economies are responding to the lagged impact of massive monetary stimulus and, now, additional fiscal stimulus such as the recent U.S. COVID-19 relief package and the upcoming infrastructure bill. With cyclical sectors expected to outperform, the outlook is especially favourable to the Canadian equity market, which is already outperforming the U.S. year-to-date. Fixed-income markets remain at risk of a continued drift higher of long-term bond yields. However, most central banks believe any near-term bump in inflation will be short-lived and so benchmark interest rates will remain unchanged at least through 2023.