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What a difference a year makes! Unlike the situation in the first quarter of 2020, U.S. stocks posted healthy gains since the start of the year, and there is optimism that the recent flurry of government checks to individual consumers, plus the huge infrastructure project on the drawing board, will give the economy a shot in the arm. Other countries are looking at the U.S. bull market with envy, and the American economy seems to have weathered its biggest challenge since at least 2008.
Just about every investment saw gains in the first quarter. The Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—gained 6.49% since January 1. The widely quoted S&P 500 index of large company stocks has gained 5.77% so far this year.
International investors saw far more modest gains. The broad-based EAFE index of companies in developed foreign economies gained 2.83% in the first quarter. Emerging market stocks of less developed countries, as represented by the EAFE EM index, gained 1.95% in dollar terms in the first quarter. Our global equity fund, DFA Selectively Hedged Global Equity (DSHGX) which is comprised of about 50% US stocks and 50% international finished up 9.0% for the quarter, which clearly outperformed the larger indexes.
Looking over the other investment categories, real estate, as measured by the Wilshire U.S. REIT index, posted an 8.81% gain during the year’s first quarter. DFA Global Real Estate (DFGEX), not an apples-to-apples comparison with the US index, finished the quarter up 6.79%.
The S&P GSCI index, which measures commodities returns, gained 15.77% in the 1st quarter. Our commodity fund, DFA Commodity Strategy (DCMSX), again not an apples to apples comparison as DFA isn’t as concentrated in oil as the index, significantly under-preformed because of its underweight to oil, and is up 5.90% for the year.
In the bond markets, the rates on longer-term securities jumped from historically low rates to simply low rates. Coupon rates on 10-year Treasury bonds rose to a 1.67% yield, while 3 month, 6-month and 12-month bonds are now sporting barely positive yields for the first time since this time last year. Our high-quality bond funds, DFA Selectively Hedged Fixed Income (DFSHX), closed down -0.31% for the quarter. DFA Global Core Plus Fixed Income (DGCFX) is down -3.92% for the year. Our Treasury Inflation Protected (TIPs) fund, DFA Inflation Protected Securities (DIPSX) is down -1.76% for the year, while our high yield bond fund, Vanguard High Yield Corporate (VWEHX), is down -0.3% for the year.
The equity-like portion of our model portfolios found Ironclad Managed Risk (IRONX), a strategy that sells put options on equity indices and exchange traded funds, up 1.72% on the quarter. AQR Style Premia Alternative Fund (QSPIX), a strategy that invests long and short across six different asset groups: stocks of major developed markets, country indices, bond futures, interest rate futures, currencies and commodities based on four investment styles: value, momentum, carry, and defensive, was up 22.30% for the quarter. Rounding out the mix of equity-like funds, LoCorr Managed Futures Strategy (LFMIX), formerly Steben Managed Futures Strategy, had a quarterly gain of 2.42%. We have these funds in our portfolio to produce returns that are not influenced by the equity markets, so they are performing as expected and much of the reason our portfolios are doing so well, relative to those without equity like exposure.
This is obviously a big change from this time last year, when stock markets in the U.S. and abroad were reeling from a historically rapid downturn. Today, most analysts believe that the market is overvalued, and many professional investors are cautious. But any move to get out of the markets when this overvaluation became evident would have meant missing huge gains in the markets, proving once again the folly of trying to time the market. And we are looking at a multi-trillion dollar infrastructure proposal which would inject additional life into the U.S. economy.
Better news: analysts have increased their earnings estimates for S&P 500 companies by 6.0%—which is a record—and unemployment rates have been trending lower since the start of the year. Finally, the progress of vaccination against COVID appears to be picking up, with some estimating that all adult Americans will be vaccinated in the next couple of months. A return to normalcy could be viewed as another positive sign.
The only dark clouds on the horizon—and these are really gray, not black—is the rise in longer-term interest rates. The U.S. Federal Reserve Board continues to hold down short-term rates to essentially zero, which means several things. First, we have a steepening yield curve, which is often an indicator of economic health. Second, people who invest in longer term bonds are finally getting paid something for their trouble. But higher long-term interest rates make bonds competitive with stocks for investor dollars, which could trigger a shift in investment flows which, in turn, could lead to lower stock prices.
All of this is a long-winded way of saying that it is impossible to predict whether the markets will continue the long bullish run or take a break. It is not impossible that stocks will eventually return to more normal valuations—suggesting prices at least 30% lower than they are today—but that could happen gradually, as companies boost their earnings while market returns go back down to single digits. The sudden, unpredicted appearance of the pandemic shows us how little we know about what is to come.