Early Returns in 2021: The Rotation Has Begun

By Tom Burnett CFA

Looking at the performance return data (March 9, 2021 issue of the Wall Street Journal) for the first ten weeks of this year, we see a clear pattern emerging. Investors are moving out of bonds and into select groups of equities, reversing many of the investment patterns of the last several years.
The most evident pattern this year is reflected in the performance returns of the fixed income sector. So far, in 2021, the worst performing sector is the “20+year Treasury Bond” whose index return is a negative 12.6%, including coupon payments. Over the past several years, many observers had warned that bond prices did not reflect the proper risk allowance and this year, those observations have proven correct.
Generally, equities have outperformed bonds, but there is a clear rotation taking place in the stock market. While the larger indexes like the Dow-Jones (up 3.9%) and the S/P 500 (up 1.7%) have outperformed bonds by a wide margin, the tech-heavy NASDAQ 100 Index is down 4.6% for the year. The real surprise is the strong performance of the smaller stocks, as shown by the 18.7% return evidenced by the S/P Small Cap 600 Index. The rotation appears to be two-sided, out of bonds into stocks, and away from large-cap tech companies and into small caps.
Commodities present a mixed picture—gold is down 11.4% and crude oil is up 34.1%. Gold is suffering from rising interest rates and possible investment flows into the Bitcoin market for inflation protection. The strong rally in crude oil prices has led to a rally in the energy stocks, as shown by the XLE sector’s positive performance of 38.2% so far this year.
These patterns can always reverse themselves as the markets move further into 2021, but the early message is clear, the rotation out of bonds and into stocks has begun.
Tom Burnett CFA is Director of Research