The global equity markets produced above average returns for the first quarter of 2021.  Most major indexes were up between 3.5% and 12.75%. Although the indexes were all positive, there were significant differences in results between asset classes.  As was the case in the fourth quarter of 2020, small caps outperformed large caps, value stocks outperformed growth stocks, and domestic stocks outperformed foreign stocks.  These relative results have remained consistent for nearly seven months since the asset rotation began.  The Russell 2000 Small Cap Index led all indexes with a three-month return of 12.69%.  The Dow Jones Industrial Average also posted strong results with an overall gain of 8.29%.  The NASDAQ continued to “cool off” with a first quarter return of just 2.96%.  International stocks managed a slightly better outcome as the MSCI EAFE Index delivered 3.61%.    

Almost exactly one-year ago stock markets were reeling from the fear and uncertainty surrounding the COVID-19 pandemic and economic shutdown.  Because the 2020 bottom was almost exactly at the end of the first quarter, the trailing twelve month returns, that were established on March 31, 2021, are spectacular (almost an exact trough to peak pattern).  The Russell 2000 Small Cap Index posted a twelve month return of 94.82% and the NASDAQ gained 73.47%.  The S&P 500 and Dow Jones Industrial Average were up 56.33% and 53.78% respectively.

The last several D’Arcy Capital Economic Perspectives have consistently warned of the increasing risk within the large cap technology growth sector and massive opportunities in nearly every other asset class.  This prognostication has served D’Arcy Capital clients well in the last twelve months.  After the stock market collapse in the first quarter of 2020, investors initially poured back into the comfort of large cap tech stocks.  However, as an economic recovery continued to develop, investors transitioned to value stocks and stocks of smaller companies.  This trend has now been consistent for the last seven months and is still just beginning.  D’Arcy Capital continues to encourage investors to fully appreciate the risk they may have in large cap growth, Exchange Traded Funds, and passive securities and transition to opportunities in value, small cap, and actively managed strategies.  To this point, the rotation from large cap growth to everything else has been a “soft landing” for large cap tech investors.  The large cap tech sector has underperformed but it has generated positive returns recently.  This may lull many investors into a dangerous complacency.  During market prosperity risk management is more important than ever.         

Looking Forward –

The financial markets continue to present high potential investment opportunities.  There is no shortage of opportunity to deploy capital.  Global economies are still in the early stages of recovery from the COVID-19 pandemic and shutdown.  Easy monetary policy and generous fiscal stimulus will continue to push prices higher and increase the revenue of publicly traded companies.  The possibility of higher inflation is much more likely than an economic slowdown in the near future.  Although the cost of living is likely to increase (inflation), investors will be able to hedge this increase by owning the same companies that are raising prices. Therefore, it is important that investors remain fully allocated to financial markets.   In real terms cash holdings are expected to lose 2.5% in purchasing power in 2021 (Inflation – Money Market Yield).

Investors should take a diversified approach to investment allocation influenced by selectivity.  D’Arcy Capital continues to limit exposure to the most expensive stocks such as Facebook, Apple, Amazon, Netflix, Google, and Microsoft.  Investors should also be careful to distinguish the difference between solid investment opportunities and over-hyped non-investments.  Most notably a speculative bubble has developed within crypto-currency.  The recent introduction of Non-Fungible Tokens (NFTs) also appears to be headed in a similar direction.  Both of these categories fall outside the scope of investment securities.  The actual digital coins (Bitcoin, Ethereum, and Dodgecoin) are simple currency exchanges and not an operating company.  Coinbase (became a publicly traded company on April 13th) is an operating company that facilitates crypto-currency transactions for a fee.  However, the revenue model of Coinbase is susceptible to intense competition.  NFTs would best be categorized as collectibles. D’Arcy Capital considers large cap value, financial firms, energy companies, emerging markets, and foreign small caps of having the most favorable risk/return ratios.  Investors in consumer companies should focus on firms that operate in more discretionary markets (i.e. luxury goods) and less on consumer staples (grocery, big box).

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