How do you feel? Are you 86% back to normal? CNN and Moody’s Analytics created the “Back-to-Normal” Index to measure progress from the pandemic back to “normal” at the state and national level based on a large set of indicators including unemployment rates, small business work hours, job postings, and consumer credit. Based on continued Fed support and a huge $1.9 trillion fiscal package, it is not inconceivable that normalcy seems nearby. At the end of March 2021, the Index showed a level of 86% at the national level, where 100 is back to the pre-pandemic period, with most individual states over the 80% level. This is the highest the Index has been since its low of 60% on April 16, 2020.
Certainly, capital markets have shown much resiliency, and volatility (!), during Q1 2021 with the S&P 500 index reaching new all-time highs at the end of March. As seen from the table below, the S&P 500 (IVV) produced a strong Q1 return of 6.33%, while a rotation to better performing small cap (SCHA) and mid cap (SCHM) equities bested that with 12.24% and 9.28%, respectively. Large cap high dividend value stocks (DVY), representing a “re-opening” market view, led the broad market indices with a robust 19.64% return. Meanwhile, other global markets including international developed and emerging market equities (SCHF and SCHE) were likewise strong at 4.47% and 3.69%, respectively.
Bond market returns, as postulated at the end of last year, kept their part of the bargain producing weak Q1 returns coming off all-time low interest rates last quarter. Broad core bonds (SCHZ) produced -3.35% returns during Q1 while investment grade corporates were slightly weaker at -5.47%. High yield “junk” bonds (HYG) eked out a small positive return of 0.58% mostly due to its credit spread component. Current 10-year Treasury yield rates of 1.7%, as part of the “back-to-normal” view, are now at levels seen near the beginning of 2020 before the pandemic took hold.
As I reported in my February 10, 2021 blog post, The Trouble with Tribbles, a return to “normalcy” will support investment strategies targeted to long term strategic views:
So, the pandemic has hurt the total return of income strategies though today, but there are signs that as we emerge from the impact of the pandemic and the economy starts approaching “normalcy” there will be a “rebound” recovery within that universe of investments. My blog post of January 3, “2020 Q4, Reversion to Mean” addresses the shifting trends we have started to see.