First Quarter Market Review
Quarterly Market Review as of 3/31/2021
Asset Class Recap
The year is off to a strong start for stocks, but bonds are hurting. Diversification across many asset classes helped long term multi-asset investors enjoy a good first quarter. The rollout of COVID vaccinations has continued to help investors feel more confident about earnings and the economy in general. Unemployment has continued to improve and consumer spending is returning to normal. These trends have propelled prices for many stock markets to all-time highs.
Unfortunately for most bond investors, interest rates have been climbing sharply since last August, when the yield on 10 year treasury bonds got down to 0.51%. Yields on those bonds climbed to 0.92% at 12/31/20, and hit 1.68% at 3/31/21. Higher interest rates help bond investors earn higher returns in future years, however, when interest rates climb, fixed coupon bond prices drop for current bondholders and we typically see negative total returns for bonds (which we had last quarter). In rising US rate environments, we also often see the dollar get stronger relative to other currencies, which puts a drag on returns for foreign denominated investments (which happened last quarter).
Source: Morningstar Data on 4/12/21
The 1 year returns in the table above show how remarkably swift and strong the stock market rebound has been since last year’s pullback.
Bitcoin is another asset that has enjoyed strong appreciation recently. Six months ago, you could buy one Bitcoin for under $11,000. At 3/31/2021, it was worth $58,919. I suspect that a significant driver of this appreciation was that some popular sites like PayPal recently added the ability for millions of users to quickly and easily convert dollars to Bitcoin and vis-a-versa. Further adoption may increase demand and push Bitcoin’s value up further, but this price inflation may be temporary and may fade quickly.
A few clients have asked about whether they should add Bitcoin to their portfolios. I like to think about Bitcoin the same way I think about gold - it can add “tail event” safety to a portfolio and has low correlation to other assets, but returns can be elusive. Cryptocurrencies do not pay dividends or interest coupons, so making a profit with these investments depends completely on price appreciation. I do not own physical gold and I do not currently own Bitcoin - not because I think there is anything wrong with them, or because I don’t value lower risk - I simply prefer to hold investments that have historically demonstrated that they are more likely to generate higher returns over multiple market cycles (traditional stocks and bonds). I recently read a terrific writeup on Bitcoin from Ray Dalio, Chief Investment Officer at Bridgewater. If you have any interest in cryptocurrency, I recommend reading it. https://www.bridgewater.com/research-and-insights/our-thoughts-on-bitcoin
Opinions expressed are as of the current date; such opinions are subject to change without notice. Huckstep Asset Management shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use. This commentary is for informational purposes only. The information, data, analyses, and opinions presented herein do not constitute investment advice, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. Please note that references to specific securities or other investment options within this piece should not be considered an offer (as defined by the Securities and Exchange Act) to purchase or sell that specific investment.
Performance data shown represents past performance. Past performance does not guarantee future results. All investments involve risk, including the loss of principal. There can be no assurance that any financial strategy will be successful. This commentary contains certain forward-looking statements. We may use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason. Since indexes and/or composition levels may change over time, actual return and risk characteristics may be higher or lower than those presented. Although index performance data is gathered from reliable sources, Huckstep Asset Management cannot guarantee its accuracy, completeness or reliability.
Cryptocurrencies, including Bitcoin, are currently unregulated, illiquid, uninsured, carry technological risks, require unique tax treatment, and are volatile.