The global stock market recorded a solid gain in Q1 2021. The markets were finished in 2020 with a big bang having delivered one of the fastest recoveries in the history after the sell-off in March 2020.
The US stock indices, Dow Jones and S&P 500 climbed to fresh all-time highs in March driven by various stimulus measures and the quick rollout of covid-19 vaccines. While the Nasdaq100 shy to break new heights after it reached a record closing high on February 12th as the investors shift their focus to economic recovery sensitive stocks and away from growth stocks.
Q1 has been a profitable year for stocks in the Dow Jones Index; where it increased by more than 3500 points. On March 18, 2021 the Dow surged above the major 33,000 resistance level for the first time in history, after the Federal Reserve said it expects to keep interest rates unchanged through 2023.
Several factors are behind the strong rally in global stocks. The quick rollout of covid-19 vaccines appeared to be the primary driver of gains in the quarter. The US stimulus bill was passed by Congress and signed into law by President Biden, providing a $1.9 trillion boost to the economy. EU countries initiated another step toward financial integration with the approval of the EUR 1.8 trillion budget for 2021 to 2027, which also includes a EUR 750 billion coronavirus recovery fund. Markets also responded positively to the Democrats taking control of the Senate. Recently, US indices retreated from the record highs on concerns about the coronavirus pandemic in Europe.
Four main downside risks for investors in Q2:
1. Rising covid-19 cases remain top concern for markets, with total global infections exceeding 123 million. Especially in Europe, worsening infection rates are raising worries of “third wave”.
2. Any attempt to reform the US tax system has a tremendous impact on the performance of the stock market. With increased government spending, we will probably see an increase in inflation.
3. Another risk for equity markets are rising bond yields.
4. The 10 year Treasury yield jumped 11 BPS above 1.75%, reaching its highest level since January 2020.