March 2021 Portfolio Management Team Update

Elvis Picardo

March 8, 2021

Market & Economic Environment

The global equity rally resumed last month after a brief hiatus in January, with North American indices trading at new highs before surging bond yields in the last week of February triggered a pullback.

The TSX advanced 4.2% in February, driven by robust gains in multiple sectors – information technology (+9.9%), consumer discretionary (+8.7%), energy (+8.5%) and financials (+6.7%). Utilities (-5.7%) was the worst-performing sector last month, followed by materials (-4.5%).

The S&P 500 gained 2.6% in February, while the Dow Jones Industrial Average rose 3.2% and the Nasdaq Composite advanced 0.9%. The performance divergence between small and large companies continued last month; as of end-February, the Russell 2000 index – a proxy for small-cap companies – had surged 11.5% for the year, while the large-cap Russell 1000 was only up 1.8%.

(Data Source: FactSet)

Our Strategy

As the rollout of Covid-19 vaccines gathers momentum across much of the world and the global economy moves towards normalcy, concerns about deflation arising from the “Great Lockdown” of Spring 2020 have been replaced by worries about inflation. In the U.S., inflation expectations are currently at their highest levels since 2008, as traders and investors price in a faster-than expected economic rebound from the pandemic. Bond yields have spiked as a result; U.S. 10-year Treasury yields are currently at 1.57%, up 43 basis points in just a month, while 10-year Government of Canada bond yields have jumped 54 basis points over the past month to 1.50%.

Rising yields have already taken a toll on high-flying technology stocks, sending the Nasdaq Composite close to correction territory (a decline of 10% from its recent high) on March 4. On the flip side, the prospect of faster economic growth is pushing up prices of commodities and energy, with crude oil trading at its highest level in almost two years.

The Portfolio Management Team (PMT) believes that the outlook for equities remains favourable over the rest of 2021 and would view a sustained equity pullback as a buying opportunity. The PMT’s view is that the current rise in bond yields to pre-pandemic levels is a natural corollary of the improving economic environment. Our client portfolios are benefiting from gains in cyclical sectors, which have offset much of the recent decline in growth stocks, while our fixed income portfolio has outperformed its benchmark due to its shorter duration. The PMT continues to monitor markets closely and will adjust portfolios as required by dynamic market conditions.

Please contact any member of the PMT if you have any questions or concerns regarding your accounts.