The market update at the end of February 2021, saw the S&P 500 stocks close at 3811.15, up 2.6% for the month reversing January’s 1.1% decline. Year-to-date the index is up 1.5% and 29% from one year ago. The small cap stocks easily outpaced large caps by increasing 7.5% on top of their 6.5% gain in January. YTD small caps are up 14.3% and an astounding 44.5% over the past year. Clients have been well rewarded given our overweight allocation to small caps in their portfolios since August 2020.
The energy sector surpassed technology as the market leader from technology late in 2020 and has yet to relinquish its position earning 21.5% in February. With last month’s gains, the sector is now up 31% over the past three months. The key element to earning these returns is investing with ETFs. We build client portfolios with ETFs having broad exposure to all S&P industry sectors. This ensures they always have exposure to the best performing sector and asset class as market leadership shifts from one sector and asset class to another.
Internationally, Developed Market equities continued to climb, posting a 2.4% return for the month and are now up 24% in the past 12 months. Emerging Markets continued their gains up 1.4% in February, bringing their 12 months return to up 29%.
While equity investors continued to be rewarded last month, fixed income investors began seeing less than positive returns for the first time in a while. Inflation expectations and concerns surrounding excessive monetary stimulus drove down bond prices which increased yields. By the end of the month, yields on the 10-year treasury had risen to 1.4% from 0.9% at last year’s end. That yield increase translated to a loss of 1.4% and 2.8% in the U.S. Aggregate Bond Index month-to-date and year-to-date respectively.
Investors should keep in mind that not everything in a diversified portfolio moves the same direction; if they did it wouldn’t be diversified. This is especially true of portfolios invested in both stocks and bonds. There are signs of inflation bubbling up which is spooking long term bond investors. It will be a bumpy ride for long term bonds in the near term, but they need to be included in a diversified portfolio.
We believe our portfolios are well positioned for our clients to participate in any future gains in the world’s equity markets. Also, with our bond allocation heavily tilted toward investment grade and government credit securities, it should be well protected against default risks.
Brad Lyons, CFP®