- March 23 marked the one-year anniversary of the market’s bottom during the onset of the COVID-19 crisis. The market has since surged over 80%, but the broader economy still has a long way to go.
- Bold infrastructure initiatives from the White House and Congress plan for trillions more in spending, along with higher debt and taxes to pay for it. Longer-term inflation is becoming a more viable concern.
- COVID-19 variants still pose a very serious threat, but with the current trajectory of vaccinations, the U.S. economy appears to be on track for a full summer opening.
- The market’s recovery has been spectacular in size and speed, but a closer look details which factors contributed before and after the vaccines arrived.
What Piqued Our Interest
It’s hard to believe a year has passed since the pandemic began, as we recently marked the one-year anniversary of the market bottom on March 23, 2020. Nearly every aspect of our lives has been impacted in some form or another, and tragically, almost three million people globally have died. Even though we appear to be on the path toward recovery, exorbitant damage has been inflicted on the global economy, particularly in the case of jobs lost. Despite a robust and above-expectations jobs report in March that added 916,000 payrolls, the total number of people employed in U.S. remains about 8 million lower than before the pandemic began. That’s roughly equivalent to five years of job gains still lost. On the bright side, with the rapid acceleration of vaccine distributions, new job creation should accelerate during the second quarter, especially in those industries most affected by the pandemic, such as leisure and hospitality.
Given the latest projections, the U.S. is on track for herd immunity possibly as early as late spring. COVID variants such as B117 and others have the potential to delay this, but it appears that by this summer, the economy should be mostly open. As the economy continues to heal, the fiscally progressive administration has moved quickly to propose additional stimulus just weeks after the American Rescue Plan became law. However, President Biden’s $2.25 trillion infrastructure-focused plan is feeling pressure from all sides in Congress as Republicans prepare for obstruction while progressive Democrats are pressing for even higher spending. A few observations seem certain: Higher taxes in some shape or form are practically a given—most likely targeted toward corporations and the wealthiest Americans. In addition, the government has demonstrated little hesitation to take on even more debt, which could very well lead to rising inflation down the road. In previous commentaries, we discussed how inflation may not be an imminent danger to the healing economy, given the slack in the labor market. But given the size and scale of the proposed spending packages, coupled with an economy that’s projected to grow 6.5% (current Real GDP change projected by the Fed) in 2021, the concerns of overheating have become more relevant in recent weeks.
Despite the above trepidations, we continue to observe more reasons for optimism across the economic landscape. The ISM manufacturing index rose to 64.7 in March—its highest reading in over 37 years. This index surveys purchasing managers to get a sense of current and expected business conditions, with any number over 50 representing an expanding economy. Both the new orders and production components of the index saw their highest levels since January 2004. Meanwhile, the ISM non-manufacturing index, which represents service industries, posted a record high in March. Respondents of the survey-based index noted that lifting COVID restrictions has unleashed pent-up demand; however, capacity constraints still remain a challenge.
Another potential tailwind for the stock market could be the reemergence of corporate stock buybacks in 2021. While often controversial in terms of their purpose, buybacks are once again on the rise, according to data compiled by Bloomberg. In the fourth quarter of 2020, buybacks from S&P 500 companies totaled $120 billion—up 28% over the previous quarter but still well below its pre-pandemic high of almost $200 billion. Bloomberg also noted that S&P 500 companies were sitting on $2.2 trillion in cash at the start of the year, and average Wall Street estimates expect earnings growth of 24% in 2021, which suggests there could be significantly more cash to buy back shares.
U.S. equities finished the quarter strong, capping off the fourth consecutive quarter of market gains since the first quarter of 2020. The big story for Q1 2021 centered on a continuation of the rotation into cyclicals, as reopening plays outperformed the initial lockdown winners. The S&P 500 gained 4.38% in March, led predominately again by value-oriented sectors. The top-performing sector was utilities (+10.5%), which had been lagging the market going into the month on the back of rising interest rates. industrials (+8.9%), consumer Staples (+8.2%) and Materials (+7.6%) all turned out impressive gains as well. The Energy sector cooled off a bit (+2.8%), but this was following a 22.6% surge last month and is still up 30.9% for the year. The sectors that dominate the Growth index all gained but notably trailed the pack, with Information Technology climbing just 1.69% in March and only 1.97% for the quarter. Year to date, the Russell 1000 Value index is up 11.26% compared to the Russell 1000 Growth index, which is basically flat at 0.94%.
One can point to the November Presidential election or January Georgia runoff election as pivotal dates that signaled an expansion of the ultra-accommodative fiscal policies that have been an enormous tailwind for stocks. In our view, the critical date was November 6, which was the Friday before the first news of the coming vaccines. Up until then, momentum stocks (defined as stocks that had performed the best over the previous year) continued to vastly outperform other factors. Stocks of higher quality also outperformed, which is intuitive, as they held up better during the downturn and were more stable during the period of higher uncertainty. On the other hand, Value stocks struggled mightily. The standout losing factor had been Value, but those did a 180-degree pivot once the vaccines signaled the onset of the economic recovery. The other major benefactor since the vaccine announcement has been Small Cap stocks, which have soared over the past four months. While on the flip side, momentum has been the worst-performing factor since November 6 with low-volatility a close second.
Source: Morningstar. Total Return Performance though 3/31/21.
Overseas, it was a mixed bag for international stocks in March, as the developed markets index MSCI EAFE was higher by 2.3%, while the emerging markets index dropped -1.51%. Developed Europe was the strongest region, with Sweden (+5.9%), Italy (+4.7%) and Germany (+4.1%) all turning in respectable gains. The stronger U.S. dollar was likely a headwind for several emerging market countries, as well as Chinese shares, which fell by over 6%. Also worth mentioning, the blockage of the Suez Canal by the giant container ship Ever Given for six days caused significant volatility for crude oil and spilled over toward international stocks that trade between Asia and Europe.
Changing gears to fixed income, yields continued their historic surge as the Bloomberg Barclays U.S. Aggregate Bond Index finished the first quarter lower by -3.37%—it’s worst quarterly performance since 1981. The yield on the 10-year Treasury climbed another 30 basis points in March and for the quarter went from 0.92% to 1.74%—the highest level since the pandemic began. The 0.82% yield backup was the largest since the fourth quarter of 2016 and the fifth largest on record over the last 30 years. Simultaneously, spreads for investment-grade corporate bonds continued to tighten, as the spread on the Bloomberg/Barclays U.S. Corporate (AA) index went from 35 to 23 basis points in March, leading to modest outperformance for credit. The high-yield index edged higher in March and finished Q1-2021 +0.85%—one of the lone bright spots across the fixed income landscape. The spread on the below-investment-grade index is now just 3.18% above the risk-free 10-year Treasury—the lowest it’s been since 2014. The municipal bond index gained 0.62% in March and is handily outperforming other taxable bond sectors YTD, even before the after-tax benefits are factored in.
Looking back, the markets have been on one heck of a ride since the pandemic began. The U.S. stock market fell by roughly 34% in under a month and has since climbed over 82% in just over one year. It’s been an emotional roller coaster to say the least. At the onset, it was highlighted by fear and despair, then came hope and optimism, and now we’re witnessing signs of greed and excess (think Tesla, Bitcoin, Gamestop, etc.). So, what wisdom have we gained throughout this episodic cycle? Most importantly, it reemphasized how important it is to not make rash decisions or let our emotions impact our investment choices. Hindsight bias affects all of us, but what seems obvious today did not feel the same way at the peak of the crisis. Maintaining a disciplined strategy aligned with one’s goals has never been more important than over the past 12 months. We also know what overconfidence breeds during these periods of unbridled optimism. There are few examples in history when stocks gained over 80% in one year, and usually these trends level off or reverse outright in the following months. Staying grounded, not chasing trends and avoiding speculative bets is likely the best course going forward.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted.
Series 7 & 63 Securities Registrations,1 Series 65 Advisory Registration† Chris has advised high-net-worth families and institutions since 2001. In his role, he incorporates his extensive knowledge managing public and private investments, including private equity and real estate. Prior to joining Wealth Enhancement Group, Chris was a portfolio manager and principal for a Dallas, Texas-based RIA, where he oversaw due diligence and portfolio management and...Read More