The U.S. equity market hit all-time highs during the first quarter and several non-U.S. markets joined the march upwards, including the Canadian and European equity markets. Additionally, the S&P 500 gained 5.8% in Q1 and its trailing 12-month gain was 53.7%, the strongest gain in the post-war period. Alternatively, bonds posted their worst quarter in 40 years.

Global interest rates rose sharply during the first quarter, led by a dramatic 0.82% rise to 1.74% in the benchmark U.S. 10-year Treasury note. Yields ended the quarter at levels last seen prior to the pandemic. The rate increase has been a mix of both higher real yields and higher breakeven rates on expectations of a modest rise in inflation take hold. Central banks, including the U.S. Federal Reserve and the European Central Bank, continue to reiterate their accommodative stances, promising to keep rates low and maintain quantitative easing programs until their economies heal further, or inflation becomes persistently elevated. Credit markets have also rotated with high yield, outperforming investment grade credit as confidence in the reopening of economies increases.

Vaccines and the U.S. stimulus have the global economy on track for a strong rebound in the second half of the year. We expect the reopening trade to continue favoring equities over bonds. After last year’s false start, the prospects for a sustained reopening of economies through the second half of 2021 are promising. The vaccination rollout, plus the latest U.S. fiscal stimulus package, has sparked fears that economic growth will accelerate too fast, placing more upward pressure on interest rates and inflation.

We agree that economies are poised to rebound sharply as restrictions are gradually lifted, but at this time there is not enough evidence to suggest that inflation pressures and interest rates will increase significantly and sustainably over the next 12 months. We believe it will take until at least the middle of 2022 for the U.S. economy to recover the lost output from the coronavirus-induced lockdowns—and even longer in other economies. Amid this backdrop, we believe that domestic economic activity should follow the current trend of recovery heading through 2022. This is due to the three levels of stimulus, a demographic tailwind, and a manufacturing surge― with the primary risks being higher inflation and premature tightening of monetary and fiscal policy.