Stocks continued to grind higher in the first three months of the year. U.S. stocks returned 6.34% in the quarter. One year stock returns are particularly impressive: U.S. stocks returned 62.5% over the past twelve months. These returns are flattered by the easy comparison to March 2020. It was only a year ago that stock markets were down a whopping 40% in just three short weeks and concerns over a pending economic collapse were widespread. The ups and downs of the market over this period serve as a reminder that time in the markets is more important than timing the market. Foreign stocks also generated strong returns, up 3.49% in the quarter.
INTEREST RATES UP
Growing confidence in an economic rebound has led to rising interest rates. While the ten-year U.S Treasury bond interest rate has more than tripled from the pandemic lows to 1.7%, rates are still at historically low levels. Historically, rising rates are not a clear negative for stocks. Rate increases from robust economic conditions support strong corporate earnings. Rate increases to curtail rampant inflation portend a slowing economy and cost pressures. With rates still low on a historical basis and limited evidence of company cost pressure and widespread inflationary pressures, the beneficiaries of rising prices have been real estate owners and stock investors. Rising rates are a headwind for bond returns, at least in the near-term. Bond returns were negative in the quarter, posting a -1.86% decline. However, last year proved that bonds often serve as a safe harbor in times of fear and allow many investors to maintain stock exposure knowing near-term funding needs are invested in less volatile holdings.
It was just a year ago that investors’ focus shifted from a return on their money to a return of their money. Pandemic fears gripped the market, lowering growth estimates for the economy and stock returns. Fast forward a year. Relatively unknown stocks, such as GameStop, increased over 500% in a month fueled by retail investors. Bitcoin and other cryptocurrencies doubled in just one month.
Are these signs of a bubble? With many sectors trading at lower than historical valuations, a bubble argument is hard to make for all stocks. However, expectations for strong returns are extremely high. It’s worth remembering that stocks can do well against a weak economy just like they did last year, and stocks can do poorly against a strong economic backdrop. In the short-term, it is anyone’s guess what the markets will do. As we have learned over the past year, things are rarely as bad as they seem or as good as they seem. Reasonable expectations and staying the course have been excellent rules of thumb to compounding wealth and managing risk.
The information contained in this material is based on sources believed to be true and reliable; however, its accuracy is not guaranteed. This material should not be construed as a recommendation to buy or sell specific securities. Views are based on market conditions, economic data, and other information at the time of publication and are subject to change.