Quarterly market themes

The EV Asset Model is empirical in nature and avoids subjective judgements. The relative attractions of different asset classes are driven directly by the model rather than judgement calls. 

Being entirely data-driven means it relies wholly on market data to build an objective interpretation of investment opportunities and changes in market conditions over any given period filter transparently through changes in prospects.

In this section, we provide an analysis of the quarter's global financial market themes. 

Yields surge

The evident change in markets globally was the sharp rise in bond yields or, equivalently, falling bond prices. Suppose you believe that interest rates are extremely low. In that case, they continue to remain so. The economy is about to return to pre-virus levels of activity, implicitly the mainstream view, then bonds look a poor bet.

The rise in yields was most significant in the US, as Treasuries experienced their second-worst quarter since 1980. Markets seemed to anticipate events rapidly overtaking Federal Reserve Chairman Jerome Powell's commitment to keeping rates low for as long as necessary to get inflation above its 2% target.

UK Gilts kept up with their American counterparts until the end of February but appeared stuck at that point. European bonds fell off the pace at the end of January. In contrast, Japanese rates hardly moved.

Dollar strengthening

The surprise was the strength of the US dollar. It started the year widely tipped to weaken, and with traders betting against it in record volumes, it confounded expectations. The effects of these widely flagged policies and developments on the most important currency make perfect sense in hindsight but were also the opposite of the consensus prediction.

Sterling did even better, at least to begin with, but the momentum that carried over from last year ran out by the end of February, and the pound fell back in March. Japanese yen, and to a lesser extent, the euro lost ground against both.

Reflation trade

Equities had a strong quarter, breaking the link with bonds after a spell in sync. This is consistent with investors positioning their portfolios for a resurgent economy and reflation but is strange after a long period of equities rising every time bonds became more expensive, the so-called TINA ("There Is No Alternative") effect.

Whether markets can move smoothly from a TINA world to a growth-driven one remains to be seen. Bitcoin has recently hit all-time record highs, Gamestop managed to maintain prices achieved in an unusual short squeeze and, most extraordinarily, a $100m valuation for Your Hometown Deli. A company owning a single diner in New Jersey with $20,000 sales when it was fully open in 2019, meaning there is a lot of money riding on a transition being a success.

US stocks led the way but European and, with a strong pound behind them, UK stocks were not far behind. Japanese stocks were not strong enough to overcome the weakness of the yen.