The first quarter of 2021 was full of headlines within the stock market. From Gamestop in January to the crumbling of $25bil Archegos in March, explosive events abounded. That being said, the most important narratives began in early January when Democratic candidates won both seats up for grabs in the runoff elections for the US Senate in Georgia to swing the balance of power in Congress. From that date forward, financial markets shifted to reflect a growing importance of fiscal stimulus. While monetary stimulus dominated the 2010s, the
fiscal element lacked.
A new school of thought has gained prominence in recent years with respect to how to view our debt situation. That is, that the United States is a sovereign currency issuer which “prints its own currency” and does not rely on tax revenue to spend additional dollars. These proponents believe that inflation, not solvency is the only constraint on borrowing and spending. Given the low levels of inflation, the belief is that the US can borrow significantly greater sums to spur aggregate demand. We are seeing the manifestation of these beliefs today with the passing of the $1.9T stimulus from the Biden administration that will send checks to Americans with dependents, up to certain income thresholds. This will mean a sizable stimulus for the lowest income segments which traditionally have the highest marginal propensity to consume.
Financial markets responded to this philosophical change as participants believe this will lead to greater economic activity, higher inflation, and a more robust recovery. Longer term interest rates began to move higher. The 10-year U.S Treasury yield rose from 0.91 percent to 1.74 percent during the first quarter. Meanwhile, short term interest rates remained steady as the Federal Reserve reinforced their promise to keep the Federal Funds rate low until inflation stays above their target for a period of time.
The S&P 500 rose 6.35% during the first quarter of 2021. Sectors which are most sensitive to an economic recovery and inflation performed the best during the quarter. Financials rose 16%, industrials 11.5%, and energy 30.8%. This was a combination of investors betting on reopening stocks as well as cyclical stocks coming back into favor with the ongoing fiscal stimulus. The technology sector lagged behind rising 2.4% during the quarter. All told, risk assets continued to advance during the quarter fueled by low rates, fiscal stimulus, and a quicker than expected vaccination rollout.
ALTERNATIVE INVESTMENT COMMENTARY*
Hedge funds extended their upward trend as the HFRI Fund-of-Funds Composite Index rose by 2.5% during the first quarter. The alternative sector trended higher alongside global markets as equities were supported by the roll-out of Covid-19 vaccines and news of further US fiscal stimulus. ‘Equity Hedged’ and ‘Event-Driven’ continued to be among the best alternative strategies as the HFRI Event-Driven (Total) Index and HFRI Equity Hedged (Total) Index rose by 8.2% and 7.4%, respectively. The majority of our managers posted positive returns during the quarter and we were pleased with their ability to navigate through markets during times of heightened volatility. We remain excited with the current positioning of the managers on our platform and are extremely pleased with the strong start from the new managers we allocated to during the first quarter.
*Data taken from HFRI (Hedge Fund Research Indices) as of April 8th, 2021
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