Descending From the “Easy Policy” Mountain Summit

A year ago it would have been hard to imagine where we’d be sitting today. In our first-quarter 2020 Market Commentary, we laid out four markers we needed to hit in order to achieve an economic recovery. For much of the last six to nine months, as we’ve hit and made progress on all those markers, we’ve been forecasting that a broadening and strengthening U.S. and global economy would lead to a broadening and strengthening U.S. global equity market.

As we close the first quarter of 2021, that’s exactly what has played out. The rising pace of vaccinations coupled with additional fiscal and continued monetary stimulus has increased optimism. That, in turn, has led to what appears to be a broadening economy, which has led to a rising and broadening market.

This stands in contrast to the narrow economy that we believe existed from mid-2018 to mid-2020, which was caused by the global trade war and then continued with COVID-19. The response to the virus created a narrow market led by the relatively unimpacted technology sector and growth stocks, which are concentrated in the U.S. Large Cap (S&P 500) equity market. At the time, other equity market segments suffered.

But as we moved through the past year, we saw a broadening recovery take hold in the fourth quarter. The first quarter of 2021 saw a continuation of the rotation to more cyclical sectors and asset classes. During the first quarter, cyclical asset classes such as U.S. Small Cap (+18.23 percent) and U.S. Mid Cap (+13.47 percent) outperformed U.S. Large Cap (+6.17 percent), and value stocks (+11.89 percent) handily bested growth stocks (+1.19 percent).

Now, as we enter the second quarter, U.S. economic leading indicators are pointing toward rapidly strengthening economic growth. The Institute for Supply Management (ISM) Service and Manufacturing Purchasing Managers Indices recently posted historically high levels. Manufacturing notched its highest level since 1983, while the Services index posted its highest level since its inception in 1997. Validating our broadening economic commentary, of the 36 industries that are represented in the two surveys, 35 are now reporting growth. That’s up from 14 at the end of 2019 (trade war impact) and four industries in April 2020, when COVID-19 sent the U.S. economy into a plunge.

It would appear there’s no longer an argument about a K- or V-shaped recovery. The recovery looks very much like a V, as it’s now beginning to encompass all areas of the U.S. economy — even the previously beleaguered U.S. leisure and hospitality industry.

As we enter the second quarter, U.S. economic leading indicators are pointing toward rapidly strengthening economic growth.

This is not to say that there aren’t people still being impacted by COVID-19, but that number is rapidly shrinking. The last two U.S. jobs reports have shown dramatic growth, especially in the remaining COVID-19-impacted parts of the economy. Of the nearly 1.4 million private sector jobs added in the last two months, the leisure and hospitality segment leads the way with 664,000 additions as the economy continues reopening.

With vaccinations rising and the economic growth outlook firming, we believe that equity markets will move higher in the coming months, albeit at a moderating pace and with potential heightened volatility as investors ponder what lies ahead. While broad diversification remains a core philosophy, we continue to recommend investors lean into more cyclical sectors and asset classes to capture the coming economic boom.