Developed Markets Rise in March
In the month of March, international developed stock markets rose by 2.55%. Europe ex UK and Canada recorded returns of 3.19% and 4.94%, respectively. Pacific ex Japan and Japan lagged other markets. The U.S. market is up 5.37% through the first quarter, with most of the return coming from value-oriented stocks outside of the technology sector. International developed markets performed well during the quarter, rising 4.04%. Financial markets may benefit from continued easing of COVID-19 restrictions and the potential passage of a multi-trillion dollar U.S. infrastructure package.
Emerging Markets Mixed in March
Broader emerging markets posted a -1.55% return for the month. Mexico and Russia recorded returns of 8.38% and 5.22%, respectively. Korea and China lagged other markets in March. Commodity-oriented markets such as Russia received a boost from economies steadily reopening. These countries may benefit from any future fiscal stimulus packages or infrastructure projects.
Utilities and Consumer Staples Outperform
Utilities and consumer staples recorded returns of 8.06% and 6.77%, respectively, in March. Information technology and telecommunications lagged other sectors. The energy sector, after a difficult ten-year period and tough 2020, recorded a first quarter return of 20.58%. If countries effectively manage their vaccination programs along with the reopening of their economies, then energy stocks may benefit further. Financials, which benefited from a steepening yield curve, rose by 12.53%.
Value and Size Premia Outperformance Continues
In March, value outperformed growth in the large-cap space and small-cap space. Momentum recorded a return of -0.38%. Small-cap value stocks started the year strongly and are now up 21.17% 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.
Value Outperforms in International Markets
In the international developed markets, value outperformed growth in the large-cap and small-cap space. Momentum recorded a return of 0.58% while small-cap emerging market stocks posted a return of 1.61% 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.
Short-Term Interest Rates to Remain Low
In March, the three-month Treasury bill index returned 0.01% 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 February.
Fixed Income Hurt by Rising Long-Term Interest Rates
The returns of deflationary hedges were mixed for the month. Long-term government bonds returned -4.96% in March after long-term rates continued to inch up. They are now down approximately 13.39% for the year. The Bloomberg Barclays U.S. Agg Bond Index returned -1.25% in March. 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%.
U.S. REITs Finish Quarter Strong
Inflation-sensitive investment returns were mixed for the month. U.S. real estate and infrastructure were up 4.64% and 4.41%, respectively. The Bloomberg Commodity index posted a return of -2.15%. US inflation-indexed bonds dropped as their higher durations proved to be a headwind. Gold bullion dropped 2.97% in March and is now down 10.41% for the year. However, ongoing large fiscal deficits, high debt levels, and easy monetary policy may create tailwinds for gold investors in the coming years.
U.S. Dollar Appreciating
Over the past three months, the U.S. dollar appreciated against most other major currencies. The U.S. dollar appreciated against the Japanese Yen, the Euro, and the Israeli New Shekel the most. The Canadian dollar strengthened against the U.S. dollar. 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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