Q1 Review: Three Months Down

A Rocky Quarter for Tech Stocks

The first quarter of 2021 is now officially in the rearview mirror. Q1 was a three-month stint during which the United States swore in a new president and retail trading made its way into the national spotlight. It was also a period defined by rising treasury yields which sparked concerns about inflation. Rising rates then weighed on high-profile technology stocks.

After leading markets higher in 2020, major technology names came under pressure during the first three months of this year. Just this week, for example, tech shares faced a sell-off after 10-year US Treasury yields hit a 14-month high, prompting investors to rotate into cyclical stocks. While tech stocks recovered from the sell-off earlier this week, the Nasdaq came close to posting its first down month since November.

At the heart of the issue is how investors value and compare certain assets. Historically low rates have made bonds unappealing over the past few years, and traders have instead allocated capital to tech names with high growth prospects. But with rates rising, bonds are now starting to look more attractive. Some capital is exiting tech and entering debt as a result.

The Rise Reddit Trading

The first quarter of 2021 will also be remembered as a time of intense retail trading activity, especially as it relates to investors who were inspired by online chat forums. Individual investors took to Reddit and other message boards to discuss trades and trends in the stock market.

In January a large number of these traders piled into stocks including GameStop (GME) and AMC Entertainment (AMC), causing the share prices of these companies to surge. This resulted in significant losses for a handful of institutional investors who had shorted these stocks. The coordinated effort took Wall Street by surprise and highlighted the power of the internet.

Vaccine Rollout and Hopes of Economic Recovery

The COVID-19 vaccine rollout was another important aspect of this last quarter. Over 53 million Americans have already been fully vaccinated and supply chains are in place to deliver millions of shots in the coming weeks.

As vaccines become more widely available and local governments ease restrictions on businesses, investors have high hopes for an economic recovery. The Federal Reserve has also said it plans to keep interest rates near zero, and the Federal government is in the process of deploying trillions of dollars to jumpstart the economy. As a result, investors are moving their money into cyclical stocks which have taken a hit during the pandemic.

The year’s first quarter was full of surprises. The economy appears to be on track for reopening and stronger growth during the upcoming quarter, though there may be unexpected twists and turns along the way.

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