April 2021 Monthly Market Review
The Biden administration announced additional fiscal stimulus in April. After signing the $1.9 trillion ARPA of 2021 and announcing a $2.0 trillion infrastructure plan in March, a new $1.8 trillion package—called the American Families Plan (AFP)—was unveiled by President Biden at his first speech before a joint session of Congress. The AFP would be funded through a variety of tax increases targeting corporations and wealthy individuals.
In addition to fiscal stimulus, the Fed maintained accommodative monetary policy. U.S. equities led global markets higher and growth outperformed value—a reversal of recent trends. Real assets, notably energy and metals, performed well as inflation expectations remained upbeat. In a change from last March, bond yields trended lower, leading to positive performance in Treasuries and credit. The U.S. dollar displayed weakness in April, a change from the previous month.
The ongoing vaccine rollout, improved economic activity, and strong corporate earnings led to another solid month for domestic equities. The Russell 3000 Index gained 5.2%, notching its third consecutive month of positive performance and finishing ahead of MSCI EAFE (+3.0%) and MSCI EM (+2.5%) Indexes.
In a reversal from earlier in the year, U.S. growth stocks outpaced their value counterparts, with the 6.5% gain of the Russell 3000 Growth Index beating the 3.9% return of the Russell 3000 Value Index. Likewise, large cap stocks outpaced small caps after lagging during the first quarter; the Russell 1000 Index gained 5.4% versus 2.1% for the Russell 2000 Index.
All 11 GICS sectors finished April in positive territory. Real estate (+8.0%) was the best performing sector as Treasury yields pulled back following a sharp rise earlier in the year. The communications services (+7.4%) sector followed closely behind, propelled by strong earnings from Alphabet (+16.5%) and Facebook (+10.4%). Energy (+0.6%) was the worst performing sector after experiencing strong gains in the first quarter. Defensive consumer staples (+2.2%) was the second worst sector, failing to keep up in a strong up market.
Markets followed a similar pattern abroad. The MSCI EAFE Index rose 3%, with all sectors but energy posting gains in excess of 1.6%. Underperformance of energy weighed on broader value returns (+1.9%), while growth (+4.2%) was bolstered by strong performance of tech names (+6.2%). From a country perspective, nearly all developed markets registered a positive return in U.S. dollar terms. The only exception was Japan, which declared a third state of emergency in response to a resurgence of COVID-19 cases. The declaration resulted in new restrictions imposed across Japan’s major cities. Although Japan’s COVID-19 related infections and deaths per capita remain well below those of the U.S., Europe, and other peers, the timing of the announcement rattled the market as it came just prior to Japan’s major holiday season (Golden Week) and with the Summer Olympics slated to begin in July.
Within emerging markets (+2.5%), growth (+2.7%) outpaced value (+2.3%) once again, but by a narrower margin. Most countries performed roughly in line with the broad benchmark. The notable exceptions were Brazil (+8.8%) and India (-0.3%). Brazil’s return was boosted by its exposure to materials (+8.5%), the top performing benchmark sector. Like Japan, India was hampered by another wave of COVID-19 cases, prompting calls for another full lockdown.
Despite another massive fiscal package, inflation expectations were largely unchanged. Treasury yields from the 5-year point of the curve to the 30-year maturity all fell. With the front-end of the curve out to the 2-year anchored, the curve flattened and helped long-term Treasuries rise 2.3%, outperforming intermediate term, 5–10 year, and 1–3 year Treasuries. Following the worst quarterly performance since the credit crisis in the first quarter, investment-grade corporates gained 1.1% during the month. High yield bonds also rose 1.1% in April, building off of the 0.9% first quarter gain.
After the sharp rise in yields during the first quarter, investors questioned how much further rates could rise. One interesting metric that may serve to limit another significant rise in bond yields is the Federal Reserve’s long-run federal funds rate forecast. Each Federal Open Market Committee (FOMC) member submits an estimate of where they expect the federal funds rate will be over the next several calendar years and over the long-run, which is published as part of the Fed’s Summary of Economic Projections each quarter.
Since the Fed started publishing its forecasts, the long-run federal funds rate projection has served as a ceiling to changes in the 30-year Treasury yield, as shown in the chart above. This ceiling was pierced during the Trump administration when markets priced in a sharp reflation trade—at a time when the economy arguably did not need stimulus and many felt the Fed was behind the curve. However, the historical relationship resumed and despite several massive rounds of fiscal spending and accommodative monetary policy, the long-run federal funds rate continued to limit the upside in long-term Treasury yields.
Falling Treasury yields were not the only change in April. The U.S. dollar strengthened in March, but sold off in April as interest rate differentials between the U.S. and the rest of the world narrowed.
The Dollar Spot Index (a measure of the dollar’s value relative to six major trading counterparts) fell 2.1% in April. Among developed market currencies, notable gainers included the Swiss franc (+3.2%), the Swedish krona (+3.1%), and the euro (+2.4%). Outside of appreciation versus a few EM currencies such as the Argentine peso, Colombian peso, and the Indian rupee, the dollar fell against all other EM counterparts. The key EM currencies that rose against the dollar included the Polish zloty (+4.1%), the Brazilian real (+4.0%), the Czech koruna (+3.4%), and the Israeli shekel.
Overall, real asset categories had another strong month with real estate delivering the strongest returns, fueled by vaccine roll outs, economic growth, stimulus measures, and a drop in yields. The continued move higher was broad-based across traditional real estate sectors such as apartments, hotels, and office, as well as new economy or growth sectors, including self-storage, data centers and cell towers. Retail property stocks, including shopping centers (+11.9%) and mall REITs (+8.5%), outperformed as consumers increasingly returned to in-person dining, retailing, and entertainment outlets. Year-to-date traditional sectors, which were hardest hit by the pandemic, have produced some of the strongest results with malls up 42.7% and lodging up 23.3%. Elsewhere, commodities rallied 8.2% as a recovery in demand—stemming from broad based economic growth and a fresh round of fiscal stimulus—outstripped supply in the industrial metals, agriculture, and energy categories. A weaker dollar, which makes commodities less expensive for foreign currency holders, also provided a tailwind to prices.