Economic & Market Commentary | April 22, 2021

Quarterly Commentary | April 22, 2021

GW & Wade's Q1 2021 Economic & Market Commentary

by  GW & Wade



Both the public health and the economic crises in the U.S. appear to have improved so far in 2021. The economy, which had been boosted by the recently enacted COVID relief bill, appeared to be mirroring the improving public health situation. So far this year, a wide array of macroeconomic indicators has significantly bested consensus estimates.

Household spending on goods has risen notably so far this year, although spending on services has remained low, especially in sectors that typically require in-person gatherings. The housing sector has more than fully recovered from the downturn, while business investment and manufacturing production have also picked up.

Conditions in the U.S. labor market have continued to improve as well. Employment rose by 379,000 in February. However, the business sectors that rely on close social proximity in order to deliver services (e.g. restaurants) have not come all the way back and employment may still be adversely impacted by local restrictions and lockdowns.

In many foreign countries, growth moderated at the end of 2020, as a spike in COVID hospitalizations and deaths led to tighter public health restrictions. Retail sales and measures of services activity weakened even as manufacturing and exports remained more resilient. Foreign economic activity should strengthen later this year as vaccinations rise, COVID case counts decline, and social distancing eases. It should also be aided by some drawdown in the stock of excess savings, continued fiscal and monetary support, and strong U.S. demand. The turnaround in growth in each country will depend on success in controlling the virus as well as on available policy space and underlying macroeconomic vulnerabilities.


The recent headway made in the U.S. on vaccine development, fiscal support, and people and business adaptability has been nothing short of tremendous. We expect strong economic growth and job gains to continue, with full recovery over the next 1 to 2 years.

As the economy reopens, the potential release of pent-up demand could drive stronger growth in 2021 than seen in decades. However, it is uncertain how much pent-up consumption will be unleashed when social distancing completely lifts, and how much household spending will result from the new stimulus and accumulated savings. Additional fiscal support is likely to provide a significant boost to spending when vaccinations are sufficiently widespread to support a full reopening of in-person services. Various measures of financial conditions are broadly accommodative relative to historical levels and should remain so.

The improving public health picture and trillions of dollars of fiscal stimulus have led to an increasingly optimistic outlook for the economy over the next two years. U.S. real GDP is likely to grow at least 6.0% in 2021, marking the fastest recovery in more than 30 years.

Market Developments

In the U.S., January began with protestors storming the U.S. Capitol to disrupt the certification of the presidential election. Joe Biden was sworn into the nation’s highest office less than two weeks later. Domestic equity markets experienced the biggest short squeeze in 25 years, and significant U.S. fiscal policy developments made headlines. Finalizing an early policy victory, President Biden signed a $1.9 trillion COVID-19 relief package into law. And on the final day of the quarter, the president proposed a $2.3 trillion infrastructure plan. Talk of inflation ramped up during the quarter, and the S&P 500 closed the period near an all-time high.

Overseas, equity markets produced positive gains but underperformed their U.S. counterparts. In Europe, markets rose on hopes of a global economic recovery. Sectors that fared poorly in 2020, such as energy, financials, and consumer discretionary, performed well, while more defensive areas of the market lagged. In Japan, stocks generated modest gains as corporate profits improved. Following their strongest quarterly return in more than a decade during Q4 2020, emerging market stocks climbed higher. Gains were realized despite late quarter weakness as vaccine efforts lagged and activity restrictions were renewed in some countries.

The first quarter was a difficult period for fixed income investors. Bond yields rose sharply amid the ongoing rollout of COVID-19 vaccines and the expectation of significant U.S. stimulus. The yield curve steepened as the 10-year U.S. Treasury yield increased from 0.93% to 1.74% while the 2-year yield rose only modestly. Given the rise in interest rates, Q1 was the second worst quarter since 1980 for U.S. Treasuries. Duration risk management was essential during the period. Investment-grade corporate bonds produced a negative result, while high yield corporates and preferred stocks generally held up well. Other risk-on fixed income segments such as emerging market debt had a challenging quarter.

Market Outlook

The next phase of the economic rebound - when services reopen, employment grows, and overall activity improves - should benefit risk assets. In the U.S., equity market valuations appear rich. However, the expectation for relatively low interest rates at least partially justifies elevated valuation metrics. It may be appropriate to modestly reduce exposure to those areas of the market that are valued the highest, including mega-cap names and growth stocks, and diversify into more value-orientated stocks. Compared to long-term averages, value appears cheap relative to growth, and the latest round of stimulus and the broader reopening from lockdowns should boost the earnings growth of cyclical sectors such as materials and industrials, which have greater representation in the value index. Subject to pandemic-related uncertainties, small-cap names are poised for solid relative returns as this asset class has historically shown strength during the recovery phase of the cycle.

Developed international equities appear attractive. If the post-coronavirus economic recovery favors undervalued cyclical value stocks over expensive technology and growth stocks, developed international equities should perform well as major foreign stock indexes are overweight cyclical value stocks, relative to the U.S. In Europe, the recovery continues to lag the U.S., but its pace of vaccinations is increasing putting the region on track for an economic reopening by the third quarter. In Japan, growth will likely lag other major economies in 2021, and the slower vaccine approval process and rollout will likely delay some form of herd immunity. Japan’s leading indicators are improving, however. In the UK, the outlook is improving in line with the economy. Earnings are poised for a strong rebound after falling 35% in 2020. And the UK market is overweight cyclical value sectors, such as materials and financials that should benefit from the post-COVID reopening. Broadly speaking, valuations overseas are attractive, with the MSCI All Country World ex-US index forward price-to-earnings ratio trading at a 26% discount to that of the S&P 500.

Emerging market stocks have historically done well when global growth accelerates, interest rates rise, and commodity prices increase as the world economy strengthens. The asset class should also benefit if the U.S. dollar remains weak. All 27 emerging market countries in the MSCI index are expected to deliver positive real GDP growth in 2021 for the first time since the global financial crisis, and the recovery of developed market economies should be good news for emerging market exports. Chinese economic growth is expected to be strong in 2021, boosted by the recovery of the global economy. Along with the tailwinds, emerging markets also face challenges exacerbated by the coronavirus pandemic. The EM asset class is a complex one that includes many markets with disparate characteristics. Emerging countries with stronger fundamentals may disproportionately benefit.

The fixed income market is a challenging one for investors. The combination of a very accommodative monetary policy and a recessionary environment drove 10-year Treasury yields to less than 1% at the start of the year. Although yields have since risen, they remain at very low levels. Furthermore, the Fed’s bond-buying programs have led to compressed credit spreads. The low interest rate and narrow spread environment limit the income potential of bonds going forward and increase the risk of capital loss when the Fed becomes less accommodative. Investors should avoid taking too much risk on high-yield or long-duration bonds as the level of risk may not be adequately compensated. On a positive note, improving fundamentals are supportive and investor demand remains strong, especially from Europe and Asia where U.S. corporate yields remain attractive.

In the municipal market, rapidly improving tax revenues along with the American Rescue Plan’s $350 billion stimulus package directed at state and local governments are supportive of municipal bond credit quality. Moody’s and S&P have revised their state and local government sector outlook from negative to stable. The potential for increases in marginal tax rates has contributed to demand for municipal.

If enacted, the potential estate, gift, and tax law changes under the new Biden administration will have an impact on the market and will be covered in an upcoming comprehensive blog post. If you have any questions, we encourage you to contact your GW & Wade Counselor or you can reach us at

Equity Valuation


Based on the S&P 500 trailing twelve-month Price-to-Earnings ratio, our gauge of U.S. equity valuation registers a current reading at the 2nd percentile from January 1957 to April 9, 2021.


Economic Activity


Based on the Federal Reserve Bank of Philadelphia’s U.S. Coincident Index, our gauge of U.S. economic activity registers a February 2021 reading at the 56th percentile from January 1979 to February 2021.


The equity valuation and economic activity gauges have been reviewed by GW & Wade and are consistent with the firm’s near-term outlook.

This economic and market commentary was prepared by Capital Market Consultants, Inc. (CMC), an independent investment management consulting firm, and has been approved for distribution by GW & Wade, LLC. Data used to prepare this report by CMC are derived from a variety of sources believed to be reliable including well-established information and data software providers and governmental sources. CMC is not affiliated with any of these sources.

The information provided above is general in nature and is not intended to represent specific investment or professional advice. No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from GW & Wade, LLC, which can only be provided through a formal advisory relationship.

This outlook contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning our beliefs and opinions in respect of the future. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements.

About the indices presented above:

• Standard & Poor's 500 (S&P 500®) Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the Nasdaq.

• The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.

• The MSCI ACWI (All Country World Index) is a market capitalization-weighted index designed to provide a broad measure of equity-market performance throughout the world.

• The MSCI EAFE Index is an equity index that captures large and mid-cap representation across Developed Markets countries around the world, excluding the US and Canada.

• The MSCI Emerging Markets Index (EM) captures large and mid-cap representation across 24 Emerging Markets (EM) countries.

• The Bloomberg Barclays Global Aggregate Bond Index measures global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate, and securitized fixed-rate bonds from both developed and emerging markets issuers.

• The Bloomberg Barclays US Aggregate Bond Index measures the performance of the U.S. investment-grade bond market. The index invests in a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States – including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than 1 year.

• The Bloomberg Barclays US Credit Index measures the investment grade, US dollar-denominated, fixed-rate, taxable corporate and government-related bond markets. It is composed of the US Corporate Index and a non-corporate component that includes foreign agencies, sovereigns, supranationals and local authorities.

• The Bloomberg Barclays US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. GW & Wade assumes no duty to update any of the information presented above.

Clients of the firm who have specific questions should contact their GW & Wade Counselor. All other inquiries, including a potential advisory relationship with GW & Wade, should be directed to:

Laurie Wexler Gerber, Client Development Manager
GW & Wade, LLC

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