Global equities generally performed well in the first quarter as the coronavirus vaccine rollout and fiscal stimulus measures boosted sentiment. U.S. stocks delivered strong returns, with most major equity indices hitting fresh all-time highs, driven by the accelerating vaccine distribution, favorable economic data, and new federal fiscal stimulus measures. The economic rebound and lingering supply chain disruption led to price pressures in some parts of the economy, but overall, inflation data remained muted. Sector performance was broadly positive across the S&P 500 Index, led by strong returns in the energy sector, as oil prices hit their highest level in over a year amid expectations of an increase in global demand for oil as economic activity normalizes. Equities were mostly positive in developed Europe, as optimism about growth eclipsed uncertainty fueled by renewed coronavirus-related lockdowns. Developed Asian and Far East equity markets also delivered mostly positive returns, driven by shares in Singapore and Hong Kong. Japanese shares rose to a lesser extent. Emerging markets equities advanced but underperformed developed markets, hurt in part by rising U.S. Treasury yields and a stronger U.S. dollar against many currencies. Chilean equities generated very strong returns and outpaced Latin American markets, while equity markets in Taiwan and Russia were notable leaders in emerging Asia and Europe, respectively.
Global fixed income markets produced mostly negative returns in U.S. dollar terms. In the U.S., high yield bonds outpaced the investment-grade market, helped by favorable corporate earnings, lower sensitivity to rising interest rates, and expectations for stronger economic growth. Conversely, longer-term corporate and Treasury bonds were among the worst performers, due to a sharp increase in intermediate- and long-term Treasury yields. Bonds in developed non-U.S. markets produced moderate losses, hurt by rising longer-term interest rates in local markets and weaker currencies versus the U.S. dollar. Notably, the U.S. dollar appreciated against the euro and yen over the period. Emerging markets bonds also generated negative returns. Local currency issues underperformed bonds denominated in U.S. dollars, as central banks in some countries raised short-term interest rates and as various currencies, especially the Turkish lira and the Brazilian real, declined against the dollar.
Benchmark Performance
EQUITIES
QTD (%)
YTD (%)
Russell 3000 Index
6.35
6.35
Russell 1000 Index
5.91
5.91
MSCI All Country World Index ex USA Net
3.49
3.49
MSCI EAFE Index
3.48
3.48
FIXED INCOME
Bloomberg Barclays U.S. Aggregate Bond Index
-3.37
-3.37
Bloomberg Barclays U.S. 1-5 Year Treasury TIPS Index
1.16
1.16
FTSE 3-Month Treasury Bill Index
0.02
0.02
ASSET ALLOCATION POSITIONING
We tilted to an underweight to stocks relative to bonds. Stock markets have rebounded from the sharp sell-off in early 2020, and equity valuations appear extended. While short-term bond yields remain anchored at ultralow levels by strong support from central banks, longer-term yields have edged higher and appear relatively more attractive, with compelling idiosyncratic opportunities in certain credit sectors.
Within equities, we are modestly overweight to international stocks relative to U.S. stocks. International equities offer relatively attractive valuations, and their more cyclical profile could be beneficial as the global growth outlook for 2021 has improved. Aggressive stimulus measures and pent-up demand could also provide tailwinds for international stocks. Within international markets, we are overweight to emerging markets stocks relative to developed market stocks. Emerging markets stocks offer attractive valuations—due in part to the sharp sell-off in early 2020—and should benefit from an improving global growth outlook in 2021 and rising commodity prices. While concerns over the coronavirus pandemic and idiosyncratic risks remain, the resilience of emerging markets broadly supports our conviction that these concerns do not pose a systemic risk. Despite the recent rapid deceleration in global economic activity, continued domestic demand and less exposure to broader global trade disruption could be supportive of certain emerging markets.
In the U.S., we increased our overweight in value-oriented equities, as they may benefit from the gradual recovery in economic growth and have attractive valuations versus growth-oriented equities. Secular growth companies, particularly those in the information technology sector, have been the greatest beneficiaries of the current recovery and, despite recent unwinding among some mega-cap names, valuations remain extended. As the recovery progresses, we believe upward pressure on interest rates will pose a headwind for growth stocks, while an improving macroeconomic environment and modest inflation could also provide a favorable backdrop for value stocks. We trimmed our overweight to U.S. small-cap stocks relative to larger companies. Following a year of unprecedented strength relative to large-caps, valuations among small-cap stocks may be vulnerable to a pullback. We pared our underweight to inflation-sensitive real asset equities. Inflation expectations have risen on an improving outlook for growth and the perception that central banks will be more tolerant of inflation as they prioritize growth and employment. While we do not expect a significant inflation shock over the next 12 months, we believe a recovery in demand—which could be substantial—is likely to put upward pressure on commodity prices.
Within fixed income, we remain overweight to high yield bonds. While valuations are relatively less compelling, yields remain attractive relative to investment-grade debt, and fundamentals are broadly supportive against an improving backdrop for growth. We believe that in the current environment, high yield bonds could deliver equity-like returns with lower overall volatility and historically have delivered attractive risk-adjusted returns in similar market environments. Nonetheless, we are cautious on risks from credit downgrades and defaults and the potential negative impact of the coronavirus pandemic on consumer-related and energy sectors, which make up a significant portion of the high yield sector. We remain underweight to long-term U.S. Treasury bonds. Treasuries remain vulnerable to steepening at the long end of the yield curve should growth and inflation expectations continue to rise. However, given current low yields, the long end is the only portion of the yield curve with room to rally in a potential risk-off environment. While we do not see significant negative shocks as likely, a modest allocation to long-term Treasuries offers ballast should significant volatility return to equity markets. We are neutral emerging markets U.S. dollar-denominated bonds. While the sector offers attractive yields compared with developed markets, relative valuations appear less attractive after the sector’s recent rally. The lack of sufficient economic means to support growth presents a headwind for emerging markets bonds, as do idiosyncratic risks and limited health care infrastructure amid the ongoing pandemic. We added to inflation-linked securities and are now overweight. Inflation expectations have risen on an improving outlook for growth and unprecedented monetary and fiscal stimulus. After a sustained period of below-target inflation in the U.S., the Fed has signaled a willingness to let the economy run hot in order to reach maximum employment, with any increase to the federal funds rate deemed unlikely through 2023. We are overweight to hedged nondollar bonds. On a U.S. dollar-hedged basis, nondollar bond yields are still reasonably attractive for U.S.-based investors, although the hedged-yield advantage has moderated as short-term interest rate differentials have narrowed, and yields are anchored by aggressive central bank policies in response to the pandemic.
OUTLOOK
Global markets have staged a remarkable recovery from the historic coronavirus-induced sell-off a year ago. While the virus remains a key risk to public health and economic activity, significant progress in the development of vaccines and therapeutics and the loosening of government restrictions have driven an uptick in sentiment. Moreover, central banks and governments have continued to deliver on aggressive monetary and fiscal stimulus measures, which have offset economic damage and provided a potent tailwind for risk assets. For the most part, markets appear to have priced in the likelihood that economic activity will continue to normalize over the coming months. However, in our view, there are several risks on the horizon that have yet to be fully appreciated.
Low interest rates, unprecedented fiscal stimulus, and indications of significant pent-up demand have built expectations for an acceleration in economic activity in the year ahead but have also given rise to inflation fears. In the U.S., proposals for further stimulus and infrastructure spending are likely to be married to an increase in corporate tax rates. Europe has seen renewed lockdowns due to a rise in coronavirus cases and significant struggles with vaccine distribution, while China faces pressures from supply chain disruption, rising commodities costs, and renewed tensions with the U.S. Although these conditions may not materialize as significant headwinds for growth, we believe they contribute to a less compelling risk/reward profile going forward and have positioned our portfolios accordingly.
The elevated levels of volatility and uncertainty in global markets underscore the value of our thoughtful strategic investing approach. Given the uncertain impact of positive and negative forces driving global financial markets, we believe that our multi-asset portfolios’ broad diversification and the strength of T. Rowe Price’s fundamental research platform should help us perform in a variety of market environments over the long term.
MARKET RECAP
Markets Advance Despite Inflation Concerns
Global equities generally performed well in the first quarter as the coronavirus vaccine rollout and fiscal stimulus measures boosted sentiment. U.S. stocks delivered strong returns, with most major equity indices hitting fresh all-time highs, driven by the accelerating vaccine distribution, favorable economic data, and new federal fiscal stimulus measures. The economic rebound and lingering supply chain disruption led to price pressures in some parts of the economy, but overall, inflation data remained muted. Sector performance was broadly positive across the S&P 500 Index, led by strong returns in the energy sector, as oil prices hit their highest level in over a year amid expectations of an increase in global demand for oil as economic activity normalizes. Equities were mostly positive in developed Europe, as optimism about growth eclipsed uncertainty fueled by renewed coronavirus-related lockdowns. Developed Asian and Far East equity markets also delivered mostly positive returns, driven by shares in Singapore and Hong Kong. Japanese shares rose to a lesser extent. Emerging markets equities advanced but underperformed developed markets, hurt in part by rising U.S. Treasury yields and a stronger U.S. dollar against many currencies. Chilean equities generated very strong returns and outpaced Latin American markets, while equity markets in Taiwan and Russia were notable leaders in emerging Asia and Europe, respectively.
Global fixed income markets produced mostly negative returns in U.S. dollar terms. In the U.S., high yield bonds outpaced the investment-grade market, helped by favorable corporate earnings, lower sensitivity to rising interest rates, and expectations for stronger economic growth. Conversely, longer-term corporate and Treasury bonds were among the worst performers, due to a sharp increase in intermediate- and long-term Treasury yields. Bonds in developed non-U.S. markets produced moderate losses, hurt by rising longer-term interest rates in local markets and weaker currencies versus the U.S. dollar. Notably, the U.S. dollar appreciated against the euro and yen over the period. Emerging markets bonds also generated negative returns. Local currency issues underperformed bonds denominated in U.S. dollars, as central banks in some countries raised short-term interest rates and as various currencies, especially the Turkish lira and the Brazilian real, declined against the dollar.
Benchmark Performance
ASSET ALLOCATION POSITIONING
We tilted to an underweight to stocks relative to bonds. Stock markets have rebounded from the sharp sell-off in early 2020, and equity valuations appear extended. While short-term bond yields remain anchored at ultralow levels by strong support from central banks, longer-term yields have edged higher and appear relatively more attractive, with compelling idiosyncratic opportunities in certain credit sectors.
Within equities, we are modestly overweight to international stocks relative to U.S. stocks. International equities offer relatively attractive valuations, and their more cyclical profile could be beneficial as the global growth outlook for 2021 has improved. Aggressive stimulus measures and pent-up demand could also provide tailwinds for international stocks. Within international markets, we are overweight to emerging markets stocks relative to developed market stocks. Emerging markets stocks offer attractive valuations—due in part to the sharp sell-off in early 2020—and should benefit from an improving global growth outlook in 2021 and rising commodity prices. While concerns over the coronavirus pandemic and idiosyncratic risks remain, the resilience of emerging markets broadly supports our conviction that these concerns do not pose a systemic risk. Despite the recent rapid deceleration in global economic activity, continued domestic demand and less exposure to broader global trade disruption could be supportive of certain emerging markets.
In the U.S., we increased our overweight in value-oriented equities, as they may benefit from the gradual recovery in economic growth and have attractive valuations versus growth-oriented equities. Secular growth companies, particularly those in the information technology sector, have been the greatest beneficiaries of the current recovery and, despite recent unwinding among some mega-cap names, valuations remain extended. As the recovery progresses, we believe upward pressure on interest rates will pose a headwind for growth stocks, while an improving macroeconomic environment and modest inflation could also provide a favorable backdrop for value stocks. We trimmed our overweight to U.S. small-cap stocks relative to larger companies. Following a year of unprecedented strength relative to large-caps, valuations among small-cap stocks may be vulnerable to a pullback. We pared our underweight to inflation-sensitive real asset equities. Inflation expectations have risen on an improving outlook for growth and the perception that central banks will be more tolerant of inflation as they prioritize growth and employment. While we do not expect a significant inflation shock over the next 12 months, we believe a recovery in demand—which could be substantial—is likely to put upward pressure on commodity prices.
Within fixed income, we remain overweight to high yield bonds. While valuations are relatively less compelling, yields remain attractive relative to investment-grade debt, and fundamentals are broadly supportive against an improving backdrop for growth. We believe that in the current environment, high yield bonds could deliver equity-like returns with lower overall volatility and historically have delivered attractive risk-adjusted returns in similar market environments. Nonetheless, we are cautious on risks from credit downgrades and defaults and the potential negative impact of the coronavirus pandemic on consumer-related and energy sectors, which make up a significant portion of the high yield sector. We remain underweight to long-term U.S. Treasury bonds. Treasuries remain vulnerable to steepening at the long end of the yield curve should growth and inflation expectations continue to rise. However, given current low yields, the long end is the only portion of the yield curve with room to rally in a potential risk-off environment. While we do not see significant negative shocks as likely, a modest allocation to long-term Treasuries offers ballast should significant volatility return to equity markets. We are neutral emerging markets U.S. dollar-denominated bonds. While the sector offers attractive yields compared with developed markets, relative valuations appear less attractive after the sector’s recent rally. The lack of sufficient economic means to support growth presents a headwind for emerging markets bonds, as do idiosyncratic risks and limited health care infrastructure amid the ongoing pandemic. We added to inflation-linked securities and are now overweight. Inflation expectations have risen on an improving outlook for growth and unprecedented monetary and fiscal stimulus. After a sustained period of below-target inflation in the U.S., the Fed has signaled a willingness to let the economy run hot in order to reach maximum employment, with any increase to the federal funds rate deemed unlikely through 2023. We are overweight to hedged nondollar bonds. On a U.S. dollar-hedged basis, nondollar bond yields are still reasonably attractive for U.S.-based investors, although the hedged-yield advantage has moderated as short-term interest rate differentials have narrowed, and yields are anchored by aggressive central bank policies in response to the pandemic.
OUTLOOK
Global markets have staged a remarkable recovery from the historic coronavirus-induced sell-off a year ago. While the virus remains a key risk to public health and economic activity, significant progress in the development of vaccines and therapeutics and the loosening of government restrictions have driven an uptick in sentiment. Moreover, central banks and governments have continued to deliver on aggressive monetary and fiscal stimulus measures, which have offset economic damage and provided a potent tailwind for risk assets. For the most part, markets appear to have priced in the likelihood that economic activity will continue to normalize over the coming months. However, in our view, there are several risks on the horizon that have yet to be fully appreciated.
Low interest rates, unprecedented fiscal stimulus, and indications of significant pent-up demand have built expectations for an acceleration in economic activity in the year ahead but have also given rise to inflation fears. In the U.S., proposals for further stimulus and infrastructure spending are likely to be married to an increase in corporate tax rates. Europe has seen renewed lockdowns due to a rise in coronavirus cases and significant struggles with vaccine distribution, while China faces pressures from supply chain disruption, rising commodities costs, and renewed tensions with the U.S. Although these conditions may not materialize as significant headwinds for growth, we believe they contribute to a less compelling risk/reward profile going forward and have positioned our portfolios accordingly.
The elevated levels of volatility and uncertainty in global markets underscore the value of our thoughtful strategic investing approach. Given the uncertain impact of positive and negative forces driving global financial markets, we believe that our multi-asset portfolios’ broad diversification and the strength of T. Rowe Price’s fundamental research platform should help us perform in a variety of market environments over the long term.