Risky investments took off at the start of 2021
NEW YORK – Who needs security when the world is about to get back to normal?
Risk stocks considered almost untouchable a year ago performed the best in the market in the first three months of 2021, topping a fourth consecutive quarter of gains for the S&P 500. Airlines, oil producers and banks have skyrocketed amid expectations that COVID-19 vaccinations and massive U.S. government spending set the stage for a meteoric economic recovery this year.
They are part of a seesaw for market ranking, as investments considered to be the safest and most reliable at the start of the pandemic have suddenly fallen to the back of the pack.
The tumble in the market has been chaotic at times – evidenced by GameStop’s sudden surge in January, as a group of investors with smaller pockets inflated the struggling video game retailer’s stock to levels well above. beyond what analysts thought was rational. But to a casual observer, the shifting tides have remained mostly below the surface of the market.
The S&P 500 posted its smallest quarterly change since the summer of 2019, even as the prices of risky investments rise enough to trigger more alarm bells that a dangerous bubble could form. Here’s a look at some of the first quarter winners and losers:
Focus on a renewal
Bank stocks climbed in the quarter for several reasons, each related to expectations of a stronger economy.
With more people finding jobs and businesses reopening, the hope is that banks will see fewer borrowers falling behind on their loans. They could also earn larger profits on new loans, as long-term interest rates have risen since last fall. The 10-year Treasury yield jumped above 1.70% after a start to the year close to 0.90%, driven by optimism for the economy and expectations of a possible increase in the inflation.
This is a sharp turnaround from March last year, when bank stocks slumped amid uncertainty over how many of their loans would go wrong as the pandemic shut down the world’s economies whole and interest rates were falling.
Energy stocks rebounded even more sharply, hitting the S&P 500’s biggest gains in the last quarter after plunging last year. The price of oil rose about 25% in the quarter on Tuesday.
If people start traveling again, it would mean more cars would go to offices and planes would go to vacation spots.
Small businesses tend to have thinner financial cushions to weather downturns, and that’s why smaller stocks were hit particularly hard in the sell-offs of the past year.
During the first quarter, however, they skyrocketed. With the economy poised to rebound, businesses can resume growth instead of just trying to survive. The Russell 2000 index of smaller stocks roughly doubled the gain of their larger rivals in the S&P 500 in the first quarter.
The bond blues
Bond funds are meant to be the ballast in any investor’s portfolio, largely holding steady while other investments swing up and down.
But many bond funds posted losses in the first quarter as Treasury yields rose. One of the factors that weighed on the prices of treasury bills and bonds, and therefore the overall corporate bond market, has been rising optimism for the economy. When this happens, fewer buyers are looking for safe investments.
There are also concerns about the return of one of bond investors’ worst enemies, inflation. With so much US government spending underway and an economy poised to rebound, some investors expect cash register prices across the country to rise after years of very modest gains. This would mean that fixed payment bonds in the future will not be able to buy as much.
Declines in bond prices pushed the average mid-term core bond fund down 2.9% in the first quarter on Tuesday, according to Morningstar.
One of the most surprisingly safe – and powerful – investments of the start of the pandemic has suddenly lost momentum.
Tech stocks have carried the market higher for much of the past year, expecting they can continue to grow, even in a home economy. Investors were also willing to pay higher prices for shares of companies where strong earnings growth seemed possible for many years to come, as ultra-low interest rates on bonds meant they weren’t losing much. yield by waiting to wait that long.
But investors are now turning their attention again to the companies whose profits are expected to grow the most as the economy wakes up. Higher interest rates add further pressure on high growth stocks, which often lagged the market during the first quarter.
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