The first quarter of 2021 saw continued strength in the markets, although not without a twist. In 2020, equity markets were largely fueled by growth stocks, while the more economically sensitive value stocks lagged far behind their peers. Since the beginning of 2021, equity market strength has been led by the “reopening trade,” that is, stocks that benefit from increased economic activity – banks, retail, travel, and construction. By the end of the quarter, the S&P 500 Index had advanced 6.18%, the Dow Jones Industrials was up 8.29% and the Nasdaq Composite eked out a gain of 2.95%.
Thus far, 2021 has been defined by a few major themes for investors: the economic impact of the newly elected Biden administration, the COVID-19 pandemic, and the ongoing bull market in equities (and other assets).
Since President Biden’s inauguration, the theme that emerged has been “Build Back Better.” Shortly after taking office, the Administration unveiled a $1.9 trillion stimulus plan with the goal of speeding the recovery. Additionally, Biden signed an executive order to “Buy American” to boost purchases of domestic goods and services. Biden has also unveiled The American Jobs Plan, a proposed infrastructure package aimed at spending on roads, bridges, clean energy, and many other concepts that could carry a sticker price of nearly $3 trillion. Many are calling it “Biden’s New Deal,” since a spending plan of this magnitude has not been promoted at this scale by a US President since FDR.
COVID-19 continued to play a large role in the thinking of investors, albeit very different from this time last year. As investors processed both the rise in the number of cases and the rise in vaccinations during the quarter, there was a marked shift in market leadership. This change – from the “stay at home” stocks that drove markets in 2020 to the “reopening trade” – dominated debate and discussion amongst investors in early 2021. As evidence, consider that the Russell 1000 Growth Index was up 0.94% in the quarter, while the Russell 1000 Value Index advanced 11.26%.
Newly diagnosed COVID-19 cases in the quarter neared 10 million, counteracted by the 143 million vaccine doses that were administered in the quarter. In the markets, the technology-heavy Nasdaq Composite weakened, while 10-Year US Treasuries nearly tripled and were at their highest levels since before the pandemic – both of which were fueled by fears of inflation.
With the above as a backdrop, the market rally that began last March has continued. As noted, the complexion has changed but stocks marched higher, nonetheless. While many have asked if we have been vaccinated, just as many seem to ask whether we are in a bubble. The answers are yes and maybe (we never really know). A major outcome from the “stay-at-home” economy in 2020 was that over 10 million new brokerage accounts were opened – by far more than any year in history. Add in the surge in price of several cryptocurrencies, Reddit users short-squeezing institutional investors (GameStop, et al), the number of companies going public, raising more than $162 billion (225 special purpose acquisition companies, SPAC’s, have raised more than in all of 2020), and the surge in non-fungible tokens (NFT’s) – the question must be considered, as excess and speculation typically define market tops. As the quarter came to a close, most major market averages were at or near all-time highs.
While it is always important to review recent history, as investors we need to constantly keep our eyes and actions forward. As we begin the second quarter and the rest of 2021, some very key questions will be answered. While we all still seek that return to a more “normal” life and many are suffering from pandemic fatigue, the economy is set to expand dramatically. The Federal Reserve lifted their forecast for GDP to above 5% in 2021 at the most recent March meeting, while most expect rates to stay “near zero” through 2023. Nearly a third of the US population has received at least one dose of the COVID-19 vaccine, and that is expected to rise to 75% by early summer at current rates. While consumer spending tanked in 2020, savings in the US has amassed to nearly $1.5 trillion. Economists expect spending on travel, vacation, dining, and clothing to surge over the next few quarters.
On the pessimistic side, interest rates have been rising, taxes are expected to rise dramatically, fears of inflation are on the rise, and technology stocks are battling inflation fears as well as increased scrutiny and regulation. Any continued weakness in the sector could weigh heavily on markets if investors lose confidence. From our perspective, inflation is the biggest cause for concern, as faster than expected inflation could lead to the Federal Reserve raising rates, which would weigh on business investment and overall growth.
As this battle between the positives and the negatives play out in the next several months, we expect volatility to return as these forces play out. From a portfolio management perspective, tactical decisions will be required to successfully navigate this environment. This means managing position sizing – trimming holdings that have grown too large or have become too expensive and adding to others that we believe to be undervalued. In that sense, volatility can be good if we use it to our advantage. It also means that it is imperative for clients to communicate any needs for liquidity with as much advance notice as possible.
As we look to the balance of 2021, we believe that our strategies are well positioned for the risk-reward opportunities that we see. While uncertainty is a constant, we remain focused on owning great companies run by bright people, with attractive growth opportunities or the ability to return cash to shareholders. We have made some adjustments throughout the early part of 2021 and will continue to do so as conditions warrant. We continue to believe that International markets offer attractive growth prospects and are encouraged by an improving fixed income market.
In addition to the above fundamental concerns, some of the technical indicators that we employ in our processes are giving us some short-term pause. Specifically, money flow breadth – a measure of underlying institutional buying and selling pressure – is currently indicating divergence. In other words, a healthy market correction (which is very normal) would not be out of order. Thus, for existing portfolios, we are carrying more cash than is typical and we are getting new money – whether for existing or new clients – invested at a much slower pace than we normally do. Should prices correct in the short term, we are ready to invest at more reasonable valuations.
Given the current backdrop – global markets near all-time highs yet plenty of downside risks, there is no better time to review your goals, revisit your future expectations and evaluate your overall asset allocation and risk tolerance. Clients that have taken advantage of WealthMap – our financial planning platform, and Riskalyze – our platform for aligning your risk tolerance to the proper investment portfolios, have gained confidence. I strongly encourage you to take advantage of all the capabilities that our firm brings to bear, which will help you to live with increased financial confidence.
Please feel free to reach out to us to review your personal situation so we can ensure that we have built your portfolio to accommodate your various needs and address any concerns that you may have. We appreciate the opportunity to serve you and appreciate the trust and confidence that you have placed in our firm.
Joseph P. Biondo
Chief Executive Officer
Chief Investment Officer
Sources: Index returns – Bloomberg; Stimulus plan – The New Yorker; American Jobs Plan – Detroit Free Press; COVID-19 cases – AJMC; Vaccine doses – Wall Street Journal, RobinHood; Federal Reserve, Brokerage accounts – WSJ; Public companies, Treasury yield – RobinHood; Wikipedia
The information set forth regarding investments was obtained from sources that we believe reliable but we do not guarantee its accuracy or completeness. Neither the information nor opinion expressed constitutes a solicitation by us of the purchase or sale of any securities. Past performance does not guarantee future results.