By John Adams, Principal and Head of Investment Banking
Financial markets went into overdrive during the first quarter of 2021 with investors big and small showing no fear of risk-taking to start the year. Factor in social media and a few rounds of stimulus checks, and it almost makes sense why many investors have been so drawn to the more speculative corners of the market.
When 2021 began, investors didn’t know that Democrats would win control of the Senate, allowing the government to push through a bigger stimulus package than many had expected. Soon, investors saw reasons to be hopeful with the Covid-19 vaccine rollout beginning to pick up its pace. Economists raised their expectations for a powerful recovery, as opposed to a more sluggish rebound many had been anticipating. And, through it all, investors had reassurance that the Federal Reserve would continue to hold interest rates near zero and that the federal government would deploy trillions more dollars in aid for the economy.
As a result, markets responded in force, with a most powerful market rotation with investors shifting money out of technology shares and into long-beaten down sectors such as financials and energy. The bet by investors was that an improving economy would lift up shares of these cyclical companies. As a result, the Dow outperformed the Nasdaq Composite Index by about 5 percentage points during the quarter (a 7.76% rise for the Dow versus a 2.78% increase in the Nasdaq), the largest difference since the fourth quarter of 2018.
Financial stocks also continued to rally during the first quarter of 2021, benefiting in-part, to potential relief to their battered net interest margins as interest rates moved higher, but remaining near historically low levels. The 10-year U.S. Treasury yield was around 1.7% at quarter-end, compared with 0.9% at the start of the year.
The SNL Bank Index posted a strong 23.6% rise during the first quarter of 2021 compared to the robust 33.7% rise in the fourth quarter of 2020 with the index now up by approximately 75.9% over the past year. The index is now up by 13.9% over the past three-year period. By comparison, smaller banks posted slightly lower returns during the first quarter of 2021, with the SNL Bank $500 million to $1 billion index increasing by 13.9% after increasing by 10.7% during the fourth quarter of 2020 with the index being up by 45.6% over the past year while posting a three year rise of 11.5%. The SNL Bank $1 billion to $5 billion index increased by 20.8% during the first quarter of 2021 after posting a 33.4% rise during the fourth quarter of 2020 leaving it up by 54.6% over the past year and up by a modest 1.2% over the past three years. By comparison, the S&P 500 was up by approximately 5.8% during the first quarter of 2021 after increasing by 11.7% during the fourth quarter of 2020 and is now up by 53.7% over the past year. The S&P 500 was up by approximately 50.4% during the past three-year period compared to the 13.9% rise for the SNL Bank Index and the 87.5% increase in the technology heavy Nasdaq.