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April 1, 2021

The equity markets rose in the first quarter of 2021, as the S&P 500 was up +6.17%, US small caps +18.24%, US mid-caps +13.47%, international developed +3.63% and emerging markets up +2.86%1.

The dynamics within the equity markets have been influenced by the 10-year Treasury yield, which rose significantly from 0.92% to 1.74% during the quarter1. For example, US small caps have a higher percentage allocation to banks than the S&P 500 has, and banks have benefitted from the rise of longer-term interest rates1.

On the other hand, the S&P 500 has a higher allocation to the technology sector, and rising interest rates have weighed heavily on that sector’s valuations1. We expect the 10-year Treasury yield to continue to rise as the economy recovers from the effects of COVID, which should prolong the dynamics mentioned above.

The latest concern among many market participants has been the financial implosion of a large investment firm known as Archegos Capital Management2. Archegos leveraged its investments in a handful of concentrated stock exposures. When one of those stocks declined in value, the loss was large enough to force Archegos to rapidly liquidate other stock exposures at suboptimal prices.

The strong recent performance of the broader stock market may tempt some investors to try to pick the winning stocks and then leverage their investments. However, we believe this latest failure of an investment firm serves as a reminder of the value of working with a trust company, where we generally advise against using borrowed funds to invest in the stock market, and we prefer to minimize single-stock risk when possible.

Investors who leverage their investments run the risk of being forced to liquidate after a short-term decline, and before those investments have the opportunity to recover in value. As for diversification, we think avoiding concentrated positions in single stocks (unless necessary for tax or other considerations) is a good way to reduce overall portfolio risk without necessarily reducing long-term returns.

 

External sources: Bloomberg data1, CNBC.com2.

Non-deposit investment products available through Members Trust Company are not deposits of or guaranteed by the trust company, a credit union or credit union affiliate, are not insured or guaranteed by the NCUA, FDIC or any other governmental agency and are subject to investment risks including possible loss of  the principal amount invested. Members Trust Company, owned and managed by America’s credit unions, is a special purpose federal thrift regulated by the Office of the Comptroller of the Currency. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Past performance is not indicative of future results.