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.

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

The markets had another relatively strong month in March.  It has now surpassed a year since the severe market correction due to initial COVID-19 shutdowns, and the one-year return data is beginning to reflect the significant comeback we have witnessed in the stock market.  The S&P 500 and Dow Jones indices are both up over 50% since last March.  As is often the case with the stock market, the time to buy is often when it feels the worst to do so.

In the bond market, the continued rise of longer-term interest rates has had a negative influence on bond prices.  While the U.S. Federal Reserve has kept short term rates near zero since March 2020, 10-year treasuries (a proxy for long term interest rates) bottomed at 0.52% in August 2020 but ended March 2021 at 1.74%.  The economic recovery and potential inflation rising as a result of spending initiatives has played a role in this rise and this trend could continue if economic growth and inflation accelerate through 2021.    

Currently, the U.S. market is mainly focused on the amount of vaccines being deployed (shots into arms), the effect of recently passed stimulus, and the infrastructure bill being proposed (spending).  Regarding vaccine deployment, state eligibility is widening in almost all circumstances with many states now allowing all adults to be eligible.  This has come as a result of increased vaccine supply levels and the expectation those supply levels will continue to rise going forward.  While this has led to significantly lower COVID cases, hospitalizations, and deaths compared to the peak months, there has been a recent flattening out on the progress as states have eased restrictions.  This situation is worth monitoring but should begin to improve again in the future as a higher percentage of the U.S. population is vaccinated. 

The current administration continues to press their budget agenda and the predominant focus has been toward the recently passed stimulus measures to support the economy and a large spending agenda aimed at improving the U.S. infrastructure.  It is our expectation that the infrastructure agenda will be a slower process than the recently passed stimulus measures and may go through significant changes prior to an actual vote.  Whether it passes or is not, the direction of both federal and monetary policy is clearly pointed toward expansion and there is no suggestion of it letting up any time soon. 

Going forward, we continue to see opportunities for the market to grind higher while the picture for bonds is less attractive. 

• Economic expansion should accelerate along with job growth, especially in hospitality and restaurant industries which are still well below prior peaks.
• Consumers are in relatively healthy financial shape and, with easing COVID restrictions, will be able to begin to spend more aggressively.
• U.S. business earnings growth should accelerate as a result of greater spending and less restrictions

All these items tend to be positive for stocks.  They also tend to lead to increased interest rates which act as a headwind for bond prices.  Further, potential inflation as a result of high levels of growth and liquidity can be negative for both assets but is more damaging to bonds. 

It is our opinion that investors maintain course and stay invested within their plan.  It is unlikely that the levels of return that we have witnessed over the last year continue at the same pace going forward, but that doesn’t mean stocks should be abandoned.  Also, while we do see a headwind to bonds, investors should not look at this as a reason to eliminate safe assets from their portfolio.  Recognize that the balance in a portfolio is done to not only diversify but to provide ballast in times of both prosperity and unpredictability.

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