April saw the bull run in equities continue – prompting further concern about how long the stock market rally is likely to continue – and bonds yields remained elevated in the face of ongoing market expectations of inflation returning.

However, in mid-May, concerns about inflation reared up again and sent the technology stocks, in particular, into a tailspin. The Nasdaq Index slumped -2.7% in one day before rebounding again late in the week.

Market inflation views are polarized between those who saw the sharp rise in the April US consumer price inflation as a transitory increase and those who are convinced inflation, and even possibly stagflation, is already emerging.

Though the macroeconomic recovery still looks set to recover faster than expected – particularly in the developed world – concerns about the tidal wave of COVID-19 infections still unfolding in India and Brazil’s inability to get the virus under control mounted during the month. Also, vaccine rollouts are proving slow in many countries, including Canada, pushing out the prospect of the world returning to a COVID-19 free environment even further.

Against this mixed backdrop, the case for global diversification across asset classes and regions become even more compelling.

In the bond market, investors are well-advised to remain wary of the outlook for an asset class that may not live up to its status as a less risky investment choice relative to stocks. Credit Suisse’s Yearbook warns that with current interest rates so low, the outlook for bonds could be less than encouraging, with significant headwinds making it difficult for bonds to produce a positive real return in the years ahead.

While bonds may be less risky than stocks when it comes to volatility, the Yearbook points out that they may prove more risky when it comes to delivering returns that beat inflation.

For now, investors are backing the stock market boom en masse, pouring their money into equities as the US stock market notches up successive new record highs. According to the Bank of America, flows into equity funds amounted to almost $600bn over five months, well ahead of the $452 billion that flowed into the asset class over the last 12 years.

By far the bulk of total funds invested (a record 64%) was invested in equities during those five months versus 18.5% into fixed interest assets and 11.6% into cash. Flows began to taper in the first two weeks of April as sentiment shifted somewhat on the downbeat COVID-19 news in India, other Asian economies and Latin American countries. A prime concern was that the new highly infectious variants of the virus that have appeared in India and the UK might set back the recovery.

However, stock markets still managed to end April in the black, with the MSCI World Index up 4.5% for the month and 9.25% for the year to date. Emerging market performance was less buoyant, with the MSCI Emerging Markets Index gaining 2.4% in April and 4.4% year to date. The Dow Jones Industrial Average’s year-to-date performance remains in double-digit territory, up 11.3% for the first four months, with the Index reaching new highs again in May.

The surprisingly strong economic rebound to date has resulted in supply shortages in industries that are struggling to scale up again after lockdowns. Chip shortages are proving to be most acute, resulting in car companies, like Ford, and businesses in other industries, shutting down factories and cutting labour forces. In the case of the car companies, the semiconductor chip shortages have forced them to reduce vehicle production. With semiconductor chips now critical components in appliances as diverse as toothbrushes and washing machines, the supply shortages could profoundly impact these manufacturers.

During April and into May, the first-quarter corporate earnings season results came under the spotlight, with most companies beating earnings expectations by a wide margin, even taking into account the low base off which the earnings growth was measured the previous year. At the beginning of the month, about 85% of S&P 500 companies had exceeded earnings expectations by 25%. European companies were also reporting earnings well in excess of expected numbers.

Despite outpacing expectations, in many instances, the share price movements didn’t reflect the good news, with, for example, Apple shares falling after announcing their strong results and Pfizer seeing no increase in its share price after delivering an almost 50% increase in earnings.

Energy performed particularly well during the month, with the oil and gas boom continuing into May. Oil prices managed to shrug off concerns that the resurgence in Indian infections would hurt demand, while gas prices were underpinned by the unusually cold weather in North America and Europe in April. Brent crude oil came close to $70 a barrel during April, while on the natural gas side Henry Hub price increased to $2.79 per million British thermal units (MMBtus) in the last week of April compared with $2.46/MMBtu in the first week.

More broadly, commodity prices soared to new highs, with the copper price pushing through $10,000 per tonne and the Bloomberg Commodity Spot Price reaching a 10-year high. A combination of the faster than expected economic rebound and massive green infrastructure programmes planned in the US and Europe sees demand for commodities used in renewable energy projects soar.

Surprisingly Biden’s announcement that government would use tax hikes, namely capital gains tax, to fund its ambitious economic recovery and infrastructure programmes, had little impact on the stock market. The muted response has been put down to the fact that the plan still needs to be approved and the still optimistic animal spirits in the equity market, which are downplaying the impact of taxes on investor returns.

The outlook for emerging markets remains mixed, largely because of the dependency these developing economies have on the growth of the developed world and their vulnerability to investor sentiment. Given their dollar-denominated government debt burdens, the strength or weakness of the dollar plays a major role in determining the sustainability of fiscal deficits that have mounted as a result of the pandemic.

However, as long as global economic recovery hopes remain in place, the high, and rising yields in the case of Turkey and Brazil, are attractive to foreign investors looking for a yield pick-up in the still ultra-low interest rate developed world markets. Should inflation materialize and become sustained, rising US Treasury yields would, however, erode the attractiveness of that premium and put emerging-market assets at risk.

Brazil remains at the epicentre of the COVID-19 crisis, although Argentina is also battling to cope with its rising infections. With economies struggling with the fallout from the pandemic, overburdened health services and high death tolls, growth is slowing, unemployment rising, and inflation is taking hold. In Brazil, the government has been reluctant to impose lockdowns, but there is increasing pressure to take the short-term economic pain to get on top of the health crisis.

China’s economy continues to recover, with gross domestic product soaring by 18.3% in the first quarter off the low base of the previous year. However, the pace of growth is dwindling. On a quarter on quarter basis, the economy grew a mere 0.6% versus the 2.6% recorded in the last quarter of 2020. Trade continues to surprise on the upside, though, as demand for Chinese goods is boosted by the US recovery and supply constraints from other countries still dealing with the COVID-19 second and third waves.

Europe entered a technical recession in the first quarter of the year as the region’s economy buckled under the pressure of the pandemic, resultant lockdowns and slow vaccine rollouts. Gross domestic product eased 0.6% in the first quarter compared with the 6.4% growth in the US in the first three months of the year.

Meanwhile, Canada is still battling the COVID-19 pandemic, with the vaccine rollout taking place slowly. The government is, however, supporting the economy by spending generously. During the first quarter, the economy is expected to grow by 6.5% annually, but the second-quarter growth figures are likely to be adversely affected by the third wave of infections underway.

The latest Canadian jobs data was disappointing. A much higher than expected 207,100 jobs were lost in April compared with a Bloomberg survey forecast of 150,000. The unemployment rate rose to 8.1% versus 7.5% the month before. In contrast, the US added 266,000, but the number was far less than the expected 1 million gain.

April highlighted that the world still has a long road to travel before it will put the pandemic behind it. Economic performance is globally bifurcated, the outlook uncertain and financial markets still volatile. Thus, diversification is undoubtedly the best way to protect your portfolio against the unexpected.

Garnet O. Powell, MBA, CFA is the President & CEO of Allvista Investment Management Inc., a firm with a dedicated team of investment professionals that manage investment portfolios on behalf of individuals, corporations, and trusts to help them reach their investment goals. He has more than 20 years of experience in the financial markets and investing. He is also the Editor-in-Chief of the Canadian Wealth Advisors Network (CWAN) magazine. He can be reached at gpowell@allvista.ca