Global stocks rose in the first quarter, but volatile trading patterns reminded investors that the road to normal will be bumpy. By carefully considering the risks that lie ahead, equity investors can prepare for the next phase of recovery from the pandemic.

Investors are optimistic that the pandemic has passed a tipping point. During the first quarter, vaccine campaigns accelerated, deaths and infection rates receded from peaks in many countries and some economies began to reopen. Despite some setbacks, particularly in Europe, the MSCI World Index advanced by 6.1% in local currency terms (Display). Regions and sectors that tend to benefit from a cyclical recovery outperformed, including smaller-cap US equities, Japanese stocks, energy and financials. Defensive sectors such as utilities and consumer staples lagged.

Left bar chart shows regional equity market returns for the first quarter, right chart shows global sector returns.

Bumpy Underlying Trading Patterns

Solid market gains masked rapidly changing market conditions. While official interest rates remained at historic lows, the yield on the 10-Year US Treasury jumped by 89% to 1.74% by quarter-end amid increasing concerns of an inflationary outbreak fueled by massive fiscal stimulus and pent-up consumer demand. Value stocks, which are widely seen as more immediate beneficiaries of a stronger economic recovery, outperformed growth stocks by a wide margin, continuing a rebound that began last November (Display, left). Yet the equity style rotation wasn’t smooth, as investors gyrated daily between growth and value stocks (Display, right).