It’s a Different World

When reflecting on the markets during the first half of 2021, it is important to understand both where we are and where we were at this point last year.  To be clear, we are not completely done with COVID as a concern, but the data continues to trend positively, and recovery is no longer imminent but is here and now.

As the stock market tends to be a forward-looking mechanism, prices reflected an economic recovery well before it actually occurred.  Over the last 12 months, US large cap stocks are up over 40%, US small cap stocks have increased over 60%, international developed are up over 30%, and emerging markets have risen by over 40%.  We are believers in fundamentals – including the health of the economy and company earnings growth – as the primary drivers of markets over the long term.  With a significant rebound in GDP, strong jobs growth, and corporate earnings that are exceeding expectations by record levels, there is no doubt that the fundamental factors have been as strong as they have been in a long time. 

The strength of market performance that has happened recently often comes with concerns about the future.  The primary point of concern so far has been inflation.  There is little doubt that inflation is present as a result of recovery-influenced demand and continued constraints on supply as a result of COVID.  Certain pockets of extreme price increases (examples being lumber and copper) have been used as talking points for whether inflation is overheated and if the US Federal Reserve needs to change course to control rising prices.  It is our expectation that inflation will remain elevated for the remainder of the year, but we don’t see a reoccurrence of the high levels of inflation witnessed in the 1980’s. 

One of the surprising occurrences of the first half of 2021 has been the direction of long-term interest rates.  It was both the consensus and our expectations that rates would rise this year as a result of economic recovery.  This has been proven accurate thus far as the US 10-year Treasury rate has risen from 0.93% at the end of 2020 to 1.45% at the end of June.  What has been surprising is the direction of rates in the second quarter.  The 10-year Treasury rate crested at 1.74% on March 19th but has subsequently fallen despite data showing continued economic growth and rising inflation.  These are typically catalysts for rates to rise, and as we expect these economic trends to continue, our stance remains that long term rates are more likely to rise than fall in the second half of 2021.

As we enter into the second half of the year, questions about what drives markets forward are changing as well.  We are less driven by COVID related data, and absent an unforeseen change in trend, we wouldn’t expect COVID to be the primary concern going forward.  The new questions for the markets are now more focused on classic concerns regarding economic growth trends, company earnings and outlooks, the trend of interest rates, and subsequent actions by the Federal Reserve. 

Again, our examination of the long-term direction of the market is based upon fundamentals.  Our opinion is that fundamentals will remain strong as the economy continues to be driven by the resumption of activity by the very powerful and quite healthy US consumer.  This tends to be favorable to continued market expansion.  However, this does not mean the market won’t face difficult times or avoid corrections.  Progression higher in the markets is rarely smooth and steady.  There are often choppy waters even as the direction remains on track.  Corrections should be planned for and expected.  Volatility will return at some point.  We cannot tell exactly what will cause this beforehand nor when it will occur, but the history of markets suggests this is a near certainty. 

Despite the potential resumption of volatility in the markets, our long-term investment approach remains steadfast.  Stay invested for the long term, have an investment plan that incorporates both safe and growth assets, and remain nimble to market changes and future opportunities. 

Posted on July 6, 2021 Read More

Value Stocks Driving the Bus (For Now)

Stocks have been strong in 2021 across nearly all regions and sectors.  As markets have hovered around all-time highs, one prevalent trend is value stocks outperforming growth stocks.  The S&P 500 Value ETF (IVE) has returned 17.63% in 2021 while the S&P 500 Growth ETF (IVW) has returned 8.19%.   This trend is relatively new, as the 3-year annualized performance of growth stocks at 20.9% still far exceeds that of value at 13.6%.  Much of the value stock outperformance has derived from the higher degree of “recovery” based stocks in cyclical sectors like financials, energy, industrials, and materials compared to the heavy technology weighting in the growth universe.  Whether this trend is sustainable will largely depend on technology stock performance and the valuation investors are willing to pay for the large companies in that sector.    

Long-term interest rates have been trending slightly downward, with the 10-year US Treasury rate ending May at 1.58% after peaking at 1.74% in March.  Short term rates, which are much more controlled by the Federal Reserve, remain at or near zero.  As we go through the remainder of the year, job growth and inflation rates will be significant determinants of long-term interest rate trends, and our opinion is that economic data would suggest higher rates later in the year.  The Federal Reserve has given several indications of allowing inflation to remain elevated in the near term to ensure the economic recovery is on solid footing.  Further, no Fed actions to slow or curb either inflation or growth have been enacted as of yet. 

As we begin to enter the summer months, much of the market analysis will be focused on the economic ramifications of loosening restrictions and the resumption of “normal” activity for a broad swath of US citizens.  Vaccination levels have increased, with recent reports suggesting over 50% of US adults have now been vaccinated paired with a current administration target of 70% with at least one dose by the Fourth of July.  Vaccination data varies across the states and expected future COVID impacts are likely to be more targeted and regional compared to countrywide as seen in the recent past. 

Further, the end of June will reflect the end of the second quarter in 2021, which also provides an anniversary of the most significant economic shutdowns due to COVID.  After this quarter, company earnings and the economy will begin to compare against recovery instead of shutdown, and company outlooks for the second half will give investors a better sense of the magnitude of economic acceleration.

As we stated last month, markets have been incredibly resilient after the severe correction of March 2020.  There have been very few instances of corrections during this time even as economic data has been more uneven.  We are clearly in economic growth mode, but despite inflation concerns as a result of capacity constraints and high demand, investors have been steadfast in buying the slightest of market dips. 

These types of markets rarely last forever.  Enjoy them while they happen but understand that volatility is a function of the market and will return at some point in the future.  This will invariably create a correction as new worries replace the old fears that either subsided or have been concluded.  This is natural and part of the investing process.  Timing this change in trend with an all in/all out strategy is incredibly difficult to do and not recommended.  While we do emphasize prudence over aggression at this time, we believe market fundamentals are on solid ground and would look to market corrections as future opportunities.

Posted on June 3, 2021 Read More

Rolling Along

Stocks continued to show positive returns in April as company earnings reports began to prove what was widely anticipated – the U.S. is recovering and growing.  Most indications of business fundamentals – whether recent positive economic data or a significant number of companies exceeding their estimates – suggest that the US economy is rebounding to a greater degree than anticipated and consumers are beginning to return to some level of normalcy. 

Stocks were up across the globe in April.  The S&P 500 was up 5.34% for the month and has returned over 45% during the last year.  Market returns are typically driven by three factors: earnings growth, dividends, and market valuation.  Both earnings and dividends are growing and are a tailwind for market performance.  Valuation, while expensive compared to history, has not significantly deteriorated as positive sentiment on the markets combined with still low interest rates have supported the above average valuations.

Conversely, the bond market has flattened over the last year as we have surpassed the year anniversary of the significant rate declines seen as a result of COVID-19 shutdowns.  The 10-year U.S. Treasury rate on April 30, 2020 was 0.64% and ended April 2021 at 1.65%.  Rising rates tend to be a headwind to bond values and is reflected in the -0.27% performance of the Bloomberg Aggregate Bond index over the last year. 

As stated last month, the discussion in the markets was primarily centered around vaccinations and federal spending via a proposed infrastructure bill.  As anticipated, the US is beginning to see a plateau and slow reduction in cases and deaths due to COVID.  As vaccines continue to proliferate, this trend should continue.  Second, the infrastructure bill is now a matter of political debate and we continue to expect this to be a longer discussion with several changes before finalizing for a potential vote. 

Now that we are in the midst of companies reporting performance and providing updates to their outlooks for the year, there is a definite level of positivity about current business situations but also what is still forthcoming.  There is little doubt that investors are receiving positive feedback for taking investment risk, and even potential negative data has been viewed through a relatively positive lens.

During these times, we believe it is prudent to maintain some level of balance and not to shift risk aggressively higher to chase returns.  From what we can see, market performance can continue to grind higher from these levels as fundamental data continues to accelerate.  However, corrections inevitably happen in markets and are typically driven by factors that come as a surprise.  This is the primary reason to have a well-defined investment plan with a diversified set of assets.  Safe assets always feel like wasted opportunities during times of significant market increase, but they also act as a form of ballast when the seas turn rough.   

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Posted on May 4, 2021 Read More
Call Us: (775) 674-2222