Monthly Market Report: April 2021

Monthly Market Report: April 2021

Commodities get boost from rising inflation expectations

 Prepared by Brandon Yee, CFA, CAIA, and Thomas Connelly, CFA

Developed Markets losing steam

Developed Markets Continue to Rise

In the month of April, international developed stock markets rose by 3.15%. Europe ex UK and Canada recorded returns of 4.59% and 5.42%, respectively. The UK and Japan lagged other markets. The Canadian stock market, which has a large natural resource exposure, is up 14.43% YTD. Inflation has picked up, getting a boost from stimulus packages, supply constraints, and easing COVID-19 restrictions. Businesses in the hospitality and transportation industries are now revising revenue expectations higher as U.S. consumer discretionary spending accelerates.

Volatility increasing in emerging market equities

Emerging Markets Steady in April

Broader emerging markets posted a 2.55% return for the month. Brazil and Korea recorded returns of 6.45% and 2.96%, respectively. India and Russia lagged other markets in April. Mexico is up 7.16% YTD. Commodity-oriented markets may continue to receive a boost as monetary and fiscal stimulus flows through the global economy. These countries may benefit from any infrastructure projects or alternative energy initiatives.

Global Sector

Telecommunications and Materials Outperform

Telecommunications and materials recorded returns of 6.43% and 5.72%, respectively, in April. Energy and industrials lagged other sectors. The energy sector, after a difficult ten-year period and tough 2020, is up 21.18% YTD. The reopening of economies and any increase in air travel will benefit energy stocks further. Financials, which benefit from rising interest rates, is up 12.53% YTD.

Domestic Equity Factors

Value Outperformance takes a Breather

In April, value underperformed growth in the large-cap space and small-cap space. Momentum recorded a return of 5.76%. Small-cap value stocks started the year strongly and are now up 23.62% YTD. Relative valuations between value stocks and growth stocks are still high based on many different valuation metrics. Value-oriented sectors such as energy and financials may still have more room to run.

Foreign Equity Factors

Growth Outperforms in International Markets

In the international developed markets, value underperformed growth in the large-cap and small-cap space. Momentum recorded a return of 4.18% while small-cap emerging market stocks posted a return of 5.49% this month. The rotation from growth into value may continue as investors become wary of high valuations in growth stocks. Rising interest rates may also pose more of a risk to growth stocks than value stocks.

Liquidity Providers

Federal Reserve to keep Interest Rates Low

In April, the three-month Treasury bill index returned 0.00% for the month. Interest rates on Treasury bills and money market funds are close to 0%. The Federal Reserve indicated they will keep interest rates at current levels until inflation picks up. Savers may face low short-term rates for a long period of time, which will negatively impact retirees and people close to retirement. The CPI decreased by -0.80% through the end of March.

Deflationary Hedges

Fixed Income Rises in April

The returns of deflationary hedges were mostly positive for the month. Long-term government bonds returned 2.32% in April but are still down 11.39% YTD. The Bloomberg Barclays U.S. Agg Bond Index returned 0.79% in April. Leveraged loans and high-yield bonds are positive for the year, but their higher credit risk makes them more vulnerable, especially if interest rates continue to rise. Real yields on many fixed income investments are still negative or close to 0%.

Inflation Sensitive Investments

Commodities Strongly Positive

Inflation-sensitive investment returns were positive for the month. U.S. real estate and infrastructure were up 8.28% and 3.54%, respectively. The Bloomberg Commodity index posted a return of 8.29%. Inflation-sensitive investments are benefiting from the reopening of economies, supply constraints and pent-up consumer demand. Gold bullion rose 4.53% in April. Ongoing large fiscal deficits, high debt levels, and easy monetary policy may create tailwinds for gold investors in the coming years.

World Currencies

U.S. Dollar Depreciated Over the Past Year

Over the past year, the U.S. dollar depreciated against most other major currencies. The U.S. dollar appreciated against the Japanese Yen but depreciated considerably against the Euro, Australian dollar, and Mexican Peso. The continuation of large U.S. fiscal deficits may weigh on the U.S. dollar in the medium-term to long-term.

Brandon Yee, CFA, CAIA – Research Analyst

Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.

 

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