Investors enjoy a stockmarket nirvana as rally remains in one piece

We are a quarter of the way through 2021 and somehow the stockmarket rally is still “in one piece”, says Katie Martin in the Financial Times. The past three months have brought plenty of market madness, from non-fungible tokens and bitcoin to the GameStop share-price surge. The recent Archegos Capital debacle, which revealed “a deep risk-management crisis” at some banks, barely caused stocks to pause for breath. Now more than ever before, as long as markets have “central-bank largesse” to fall back on, everything else seems a sideshow.

The dollar confounds expectations

America’s S&P 500 index finished the first quarter with a 5.8% rise. Germany’s Dax and Japan’s Topix indices both gained 9%, while the FTSE 100 rose by 4%. Oil has enjoyed “its best start to a year since 2005”, with prices rising by a quarter, notes Marc Jones on Reuters. The GameStop froth has cooled but shares in the videogame retailer still finished the quarter with a 950% gain.

The US dollar defied predictions that it was heading for a fall by having its best start to a year since 2015. That’s thanks to stronger US growth prospects on the back of massive stimulus. The key theme so far this year has been the “decoupling” between the US economy, which looks poised to grow at its quickest pace since 1984, and a slower recovery elsewhere, says Gilles Moëc of Axa.

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The big loser has been bonds. The benchmark ten-year US Treasury yield – which moves inversely to prices – rose from 0.9% to over 1.7%. US government bonds endured their worst quarterly performance since 1980, notes Colby Smith in the Financial Times. The Bloomberg Barclays index of longer-dated Treasuries lost 13.5% in the first three months of the year. A more inflationary outlook makes bonds a less attractive prospect.

Tech falls out of favour

Rising bond yields have “begun to puncture” the tech-stock bubble, which is especially sensitive to long-term borrowing costs, says Oliver Shah in The Sunday Times. Tesla’s shares are down by more than 5% so far this year (but they remain outrageously priced). Deliveroo’s flotation disaster (see page 16) is another sign of the sector’s dwindling appeal. This slow-motion bubble “bursting” could have “much further” to run: the dotcom crash unfolded in four distinct declines punctuated by three “deceptive rallies”. Trouble could lie ahead for markets, says Randall Forsyth in Barron’s. Higher US bond yields have a history of wreaking havoc in emerging markets, from the 1997 Asian financial crisis to the 2013 taper tantrum. While stocks are currently enjoying a fiscal high, those effects will begin to fade next year, to be replaced by proposed hikes in US corporate and personal taxes.

Rising bond yields eventually undermine a stockmarket rally by tempting investors away from equities, notes John Authers on Bloomberg. But this quarter’s rally shows that we aren’t there yet. That may change if investors panic about inflation later this year, but for now we have stockmarket “nirvana”: strong “growth without having to pay for it with higher interest rates”.