The following Q1 market update provides context for the investment performance of your charitable assets.
From Cambridge Associates, investment advisor
Just one year ago, the emergence of the COVID-19 pandemic sent shockwaves through financial markets and led to a historic recession. By the first quarter of 2021, the narrative was entirely different. As the outlook for global growth continued to improve, risk assets climbed, fueled by the swift rollout of COVID-19 vaccines and a massive U.S. fiscal spending package. Earnings momentum rebounded along with economic activity and a large proportion of companies beat earnings estimates. Cyclically sensitive equities benefitted from the improving outlook, giving way to a style rotation with value stocks outpacing growth by the widest quarterly margin in 20 years.
Rising economic optimism and the "risk-on" investment environment presented a challenging backdrop for bonds, which sold off in the first quarter as yields jumped back to pre-pandemic levels. As the U.S. ten-year breakeven inflation rate reached its highest level since 2013, investors grew nervous about the inflationary pressures that could stem from record money printing and a rapid economic recovery. Despite these worries, U.S. Federal Reserve officials didn't appear overly concerned with inflation risks. The central bank signaled plans to remain accommodative until the economic recovery and job market recovery is complete.
U.S. equities advanced and outperformed international developed markets in the first quarter. All 11 S&P 500 Index sectors gained, led by energy, which climbed more than 30% as oil prices advanced to their highest levels in more than a year for financials and industrials. Consumer staples, information technology, and utilities lagged the most. Information technology was a notable laggard as investors priced in growing risks from faster inflation and rising long-term interest rates. Value stocks bested growth counterparts by the widest margin since 2001, while small caps topped large caps for the third time in the last four quarters; small caps have outpaced large caps by 34.3 percentage points (ppts) during that period. S&P 500 Index quarterly earnings advanced by 4% year-over-year in the fourth quarter of 2020, marking the first positive quarterly earnings result since the fourth quarter of 2019. Looking ahead, analysts expect first quarter 2021 earnings to grow by 23%, and calendar year 2021 earnings to increase by 25%, rebounding from the 11% decline in full-year 2020.
Global equity markets advanced in the first quarter, as developed markets equities topped emerging markets peers. Sovereign bond prices declined amid sharply rising yields, whereas high-yield bonds bested investment-grade equivalents. Real assets broadly gained, oil prices reached their highest levels in more than a year, boosting natural resources equities, and REITs advanced amid rising interest rates, but gold suffered its worst quarterly decline since 2016. Among major currencies, the U.K. sterling and U.S. dollar mostly advanced, while the euro generally declined.
After a turbulent year, we continue to believe that Thrivent Charitable’s diversified investment approach positions the portfolios well. Our focus will continue to be on staying disciplined in our investment process, valuing liquidity, being patient, and looking for compelling new investment opportunities. For more information, please visit the financials page.