Well, after a stellar year of returns for our clients in 2020, this first quarter has been tough on our trend and momentum investment management style. It hasn’t been awful, but frustrating for sure, with the seemingly constant shifts in asset leadership since the start of 2021. January resulted in a good continuation of the growth of 2020, but then the expected February/March profit taking occurred, and at the same time, we saw a big rotation begin out of the tremendous performers of 2020 — technology and large cap growth — and into the failed asset classes of 2020 such as travel, leisure, energy, banking, and real estate. It is always messy when the market rotates asset classes during profit taking. So far this year, and in hindsight, it has been better to simply own entire indexes instead of trying to pick the most outstanding stocks. The asset class rotation, a result of the country’s attempt at reopening our economy, is not complete or even sure.
When all was said and done, the three major US large-cap indices – the S&P 500, the Nasdaq, and the Dow – finished the first quarter of 2021 in positive territory. However, in a change of leadership from 2020, it was the Dow leading the way with a gain of 7.76%, while the Nasdaq lagged, returning 2.78%, and SPX finished in the middle, up 5.77%. As was the case in the last quarter of 2020, small cap stocks once again outpaced large caps. Furthermore, Momentum, our investment management strategy, went from the best performing investment factor for two consecutive years to the worst performing factor in the first quarter of 2021. This was as a result of changing leadership trends such as the strengthening of small-cap stocks, both growth and value, and the weakening of technology and large-cap growth stocks. And since the beginning of the fourth quarter last year, value has outperformed growth substantially for the first time in a long while. Momentum was also the only investment factor to post a negative return in this past quarter, underperforming the S&P 500 Index by a negative -8.75% and the iShares Russell 1000 by negative -8.64%. It happens.
As you’ve heard us discuss before, every investment strategy, whether it is value investing, growth investing, fundamental analysis, and even trend following, goes through periods of underperformance, and Momentum/Relative Strength (RS) investing is no different. These laggard periods can be uncomfortable such as early 2016, late 2018, and now today. However, we have found that the Momentum/RS style has tended to rebound nicely out of these laggard periods, providing, at times, robust returns. Our work today is continuing to reposition the portfolio into areas of current leadership.
We know that sticking to our processes and allocating towards new and continuing areas of relative strength will make this challenge easier to get through. This is not the end of the bull market. Cash as an asset class remains at the bottom of the pile with small and mid-cap stocks at the top, indicating expectation set last year for a growing economy in 2021. We think that the US equity markets are capable of providing our clients with another nice double digit return for this year because the US equities are far and away still the best place to be. When that changes, and it will, it will be messy and frustrating again, but we believe that we will be able to discern where money is moving and move with it to give you the best opportunities to grow and preserve your wealth.
We are always happy to hear from you. Call with any questions or concerns and let Priestley know if you’d like to schedule a portfolio review and catch-up, especially if you’re not on a regular three- or six-month schedule.
