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

As we are nearing the end of winter and beginning of spring, optimism among investors seems to relay an expectation of sunnier days ahead.  With continued stimulus measures from the government combined with a new vaccine entrant in the battle against COVID, market performance has clearly favored assets levered to recovery at the expense of “safe haven” assets and companies that have benefited from a higher degree of restrictions. 

In the bond market, the Barclays Aggregate Bond Index is firmly in negative territory to begin the year.  The primary reason for bond weakness has been the rise in U.S. treasury rates, especially at the long end of the curve.  The 2-year U.S. treasury rate, which tends to be much more correlated to the Federal Reserve fed funds rate, has stayed consistent at 0.11% at the outset of 2021 and closed February at 0.14%.  The 10-year U.S. treasury rate, however, has climbed from 0.93% at the beginning of the year to rise to 1.44% by February month end.  Longer dated treasuries tend to be driven by expectations of economic growth and inflation, and the sentiment on each has been rising this year.  When rates rise existing bond prices fall, and the longer maturity assets fall more aggressively.  That is exactly what we are seeing in the bond markets now, as long maturity treasuries have significantly underperformed their shorter maturity counterparts.  The move away from “safer” assets can also be witnessed in the price of gold, which has declined over 8% year-to-date. 

The market rotation has been toward investments benefiting from increased economic activity.  Oil prices are up over 25% year-to-date and stocks in the oil and gas industry have been among the best performers of the year thus far.  Bank stocks are also up significantly in 2021 as they tend to profit from greater economic growth and a higher spread between short and long-term interest rates.  February also witnessed multi-year highs in commodity assets like copper and lumber, which benefit from increased economic growth and speculation of higher infrastructure spending. 

Currently, both fiscal and monetary policies are geared toward expansion over restriction.  The House of Representatives recently passed legislation on another round of stimulus and consensus opinion is that some version will be enacted in March.  Meanwhile, the Federal Reserve met in February and continued with expansionary policies that include buying bonds in the market and keeping short term rates near zero.  While substantial stimulus measures will have long term ramifications for inflation and certainly greater U.S. debt levels, the new administration and the Federal Reserve clearly have no intentions on pumping the brakes on the economy anytime soon. 

As we continue through the year, our team will monitor interest rates as a key driver for the markets.  Currently, we are not in an area that is dangerous to continued economic growth or to stock market valuations.  If rates continue to dramatically rise, however, they can have a negative effect on the stock market as investors become worried about runaway inflation or just begin to rotate back toward bonds given their higher income.

During times of high speculation and with significant increases in certain assets, there is always a temptation to abandon investment plans and chase higher returns.  It is human nature.  As always, it is our opinion that investors should remain focused on their long-term objectives that blend with their circumstances and risk tolerance, stay diversified with both growth and safe assets and remain nimble to market opportunities as they present themselves. 

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