April 9, 2021 – With the rollout of vaccinations ahead of schedule, summer on the way, and the government depositing more money in Americans’ bank accounts, expectations for the reopening of the economy are high.
Nearly all asset class values have continued to rise and the market environment remains very supportive. The Federal Reserve nearly guaranteeing low short-term rates for two years, the recently-enacted federal COVID relief bill, and proposed legislation for vast government infrastructure spending have provided major tailwinds for the markets. Interest rates have risen but are still historically low. Additionally, a large amount of cash currently in the hands of households, companies, and governments will be spent or invested in coming months. The personal savings rate peaked last summer with stimulus money arriving and limited options for spending. That savings rate is still more than double the ten-year average, but opportunities are resuming for consumers to return to normal or above normal spending.
Many companies, especially those based on digital platforms, benefited from the “stay-at-home” economy in 2020. Zoom, Peloton, Grub Hub, Amazon, Netflix, and many others provided services and entertainment for people stuck in their homes. These types of companies tend to be higher priced and growth oriented. With the reopening picking up speed in the past few weeks we are seeing a rotation out of last year’s best performing stocks in favor of traditional, economically sensitive sectors that benefit from an expanding economy. The focus is shifting to industries that serve people returning to normal activities: travel, hospitality, live entertainment, and shopping. In addition, broad economic activity generates a need for manufacturing such as airplanes, autos, and construction. With that comes an accompanying need for increased energy, raw materials, and transportation. Rising interest rates and economic activity have also benefited banks and other financial service providers. An economic boom is likely this year with U.S. growth expected to be 6 to 7 percent, the fastest growth since 1984. We will be watching for the resulting wage gains, inflation, and interest rate increases.
| Market Total Returns (including dividends) | Jan. – Mar. | YTD 2021 | |
| Large Co. U.S. Stocks | S&P 500 | +6.17 % | +6.17% |
| Small Co. U.S. Stocks | Russell 2000 | +12.70 | +12.70 |
| Foreign Stocks | DJ Global (ex. U.S.) | +3.53 | +3.53 |
| U.S. Taxable Bonds | Bloomberg Barclays U.S. Agg. Bond | -3.37 | -3.37 |
| Tax-Free Bonds | Bloomberg Barclays Municipal 3 Yr. | +0.15 |
+0.15 |
We will need to see continued progress curbing the virus and growing the economy to continue to validate the prices and risks now built into the markets. For client accounts, we are taking advantage of the volatility and rotational changes in the markets to opportunistically rebalance portfolios. This rebalancing enforces a “sell high, buy low” discipline that is beneficial in this rapidly changing market environment.
Current U.S. stock prices reflect the projected strong economic recovery throughout the year. Anything that delays that recovery would likely add to market volatility. As usual, there are still areas of opportunity. We will own both quality, high-growth companies and cyclical industries that are now benefiting from the reopening and economic expansion. We expect continued outperformance by small company stocks over large, and cyclical, value stocks over high growth stocks.
In foreign markets, corporate earnings are expected to be strong. Both developed markets and emerging markets stocks are benefiting from rising global economic growth. Higher interest rates and commodity prices and a weaker dollar are particularly helpful to emerging markets. A declining U.S. dollar makes foreign shares more valuable in terms of dollars, which helps boost returns on foreign denominated stocks.
We continue to expect bonds to have lower returns than normal due to historically low interest rates. The 10-Year Treasury bond ended the quarter at a yield of 1.74%, up sharply from 0.91% at the start of the year. We prefer to build core portfolios of individual municipal bonds or high-quality taxable bonds. We also supplement these with small allocations of lower rated bonds, convertible bonds, preferred stock, and specialty bond funds.
Although we provide an overview of many areas of the market, our focus when managing your portfolio is on your personal goal and an individualized strategy to reach that goal. We welcome your feedback and questions.