With America shifting to a ‘getting back to normal’, no mask stance, investors began May 2021 exhibiting a ‘risk on’ attitude, enabling stocks to advance strongly out of the gate. As can be seen from the 1st graph below, the general trend of the past seven months (since Pfizer’s vaccine news of Nov. 9th) favouring value, cyclical and ‘re-opening’ stocks, continued during early May. By mid-May, the combination of a weak U.S. jobs report and hotter-than-expected pricing data south of our border, triggered a rethink among investors, catalyzing the 2nd factor reversal year to date. Judging by the lack of reaction in bond yields shown in the 2nd graph below, it’s apparent that, for now, investors chalked the miss on jobs to timing and have given the Fed a free pass on its ‘transient’ attitude towards inflation. Most equities recovered, though value bettered growth, yet lingering investor uncertainty made a sustainable rise through 4,200; a tough nut to crack for the S&P 500 through the time of writing of this note.
April 2021 featured a continuation of the year-to-date grind higher in stocks, enabling most North American equity indices to reach all-time highs. The catalyst for this strength remained ongoing policy stimulus and the re-opening of the U.S. economy. Meanwhile, this rally has masked significant factor volatility, which in turn has driven rising dispersion between the returns generated by different investment styles. Fortunately, given that security selection at Forge First is driven by a company’s ability to generate free cash flow, our funds are largely agnostic towards factor rotation and have been able to maintain net returns in the middle of the proverbial fairway.
It’s not surprising that Q1 of 2021 was good for equities, the question is whether the optimal conditions that drove stocks higher will move from the front windshield to the rear-view mirror during the remainder of this year. Before we assess that probability, let’s review the quarter that marked the anniversary of COVID-19.
Another action-packed month in markets saw bond yields spike, oil soar and all North American indices deliver solid returns despite the sea of red during the last week of February. Once again, the funds at Forge First profitably navigated these stormy waters.