A Quarter For Your Thoughts

A Quarter For Your Thoughts

The first quarter of 2021 had no chance of one-upping the first three months of 2020 when it came to high drama.

Last year began with a reality TV host-turned US president assassinating (by drone) the most dangerous intelligence operative and field general on the planet.

Shortly thereafter, the world descended into the pestilent abyss, as the worst public health crisis in a century collapsed markets and triggered a short-lived global depression.

That’s a tough act to follow. But Q1 2021 had a few tricks up its sleeve, too. Just days after the one-year anniversary of Qassem Soleimani’s death, the US experienced its first armed insurrection in 160 years, for example.

The following month, US equity markets were treated to one of the most bizarre short squeezes of all time, when shares of a left-for-dead video game retailer surged into the stratosphere thanks to an army of irascible retail traders led by a thirtysomething MassMutual employee moonlighting on Reddit and social media under multiple aliases, including “Roaring Kitty.”

After that came a mini-bond tantrum which culminated in the closest thing to a failed Treasury auction the market has seen in quite some time. Finally, market participants witnessed what may end up being remembered as the biggest margin call in history.

Fortunately, some good things happened in Q1. Vaccine rollout ramped up in the US, for instance. And more stimulus got done. As the quarter came to a close, Joe Biden unveiled a multi-trillion dollar plan to revamp and modernize the US economy.

For assets, Q1 was defined by what, on one benchmark, was the first bond bear market in four decades.

10-year US yields climbed some 75bps over the quarter, the most in years.

Treasurys underperformed nearly every asset class with the exception of gold, which fell some 10%.

The S&P was up 6% for a fourth consecutive quarterly gain.

The Russell was the winner among US benchmarks despite falling into a correction late in the quarter.

Emerging market equities logged a fourth straight quarterly gain, the best streak in three years.

As far as “froth” goes, Bitcoin had a stellar three months. At one point, it hit $60,000. MicroStrategy (which is part Bitcoin proxy now) performed well, but Tesla and Cathie Wood struggled with higher bond yields.

Investment grade US corporate credit posted a ~5% drop in Q1, marking what looked like the worst quarter since the financial crisis. Spreads rallied, but the rates selloff dominated.

“Credit spreads have been confined to a 12bp range spanning 88-100bp in the Bloomberg Barclays Index, and should finish the quarter in the center of that range,” BMO’s Daniel Krieter and Daniel Belton wrote Wednesday, before noting that “characterizing IG credit trading as range-bound belies a strong rotation into sectors which have spent the past year trading at wide spreads due to the pandemic.”

The best performers in credit in Q1: Leisure, Energy, Services, Basic Industry, Insurance, and Transportation.

That’s as a good a segue into Q2 as you could ask for. The CDC said Wednesday that COVID-19 was the third leading cause of death in the US last year, trailing only heart disease and cancer. But just a few months into Biden’s presidency, America’s third virus wave had largely ebbed, even as concerns over variants lingered and some worried a fourth wave could still build.

Since the election, the market’s pandemic losers morphed into winners. As Q2 dawned, vaccine and reopening optimism were running high. With March melting into April, it was time to see if the Cindarella story was real.

He’s got about 195 yards left, and he’s gonna – looks like he’s got about an eight iron. This crowd has gone deadly silent. Cinderella story. Out of nowhere. A former greenskeeper now about to become the Master’s champion. It looks like a miraculous – it’s in the hole! It’s in the hole!


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