March 31, 2021
The world largely breathed a sigh of relief to close the books on 2020, though the problems faced last year are certainly not all behind us now. Still, with the tailwinds of vaccine implementation, yet another huge stimulus package, and general re-opening measures in place, stocks broadly provided upside in the quarter. The S&P 500 reached a new all-time high mark in late March and a 6% gain for the full quarter, and crossed 4000 for the first time in early April. This resurgence in economic activity has led to increased expectations for inflation, and that the possibility (along with generally very elevated valuations for bonds in this “no-rate” environment) led to considerable selling pressure for bonds at the onset of the year. The Barclay’s Aggregate bond index finished down over 3% for the full period.
The low point for stocks in 2020 was officially reached on March 23rd, so during this quarter we saw some jaw dropping 1-year returns for various broad indexes following the rally that has led to multiple record highs. We have also seen a notable rotation away from the concentrated leadership of “big Tech” names, with the large Value index having the biggest outperformance against Growth in 20 years, up 9.9%(1). We have seen brief head fakes in that direction in recent years, but given the desire for yield, lower relative valuations, and the possibility for a huge infrastructure spending bill, the Value trend may indeed have both feet under it this time.
As noted above, a massive $1.9T stimulus package has been pushed through after some divisive debate. This package will add to the already enormous stockpile of consumer cash, and this “dry powder” has been a large driver of ongoing trading in quite speculative stocks- with GameStop garnering attention as a prime example. That stock became a focus of the “Reddit Army”, an internet chat room group that banded together to drive up prices for heavily shorted stocks. The goal was both to disrupt hedge funds that held those short positions, and to benefit from the ensuing price increase as those short positions were “squeezed” and closed out. As is often true in these cases, a few traders realized huge upside but far more got caught on the wrong end as the price of GameStop (and other similarly shorted stocks) whipsawed up and then right back down. This further validates Cutler’s long-held view that speculation and prudent investing are two very different approaches.
Even as stocks have rallied from those March 2020 lows, there remain some concerning indicators about heightened volatility and uncertainty. The VIX Volatility indicator (the “fear gauge”) has significantly decreased from the record highs of March 2020, but still remains about double the readings for most of 2019. Unemployment has come well down from the high mark of roughly 15% closer to 6%, but reaching the sub-4% level from 2019 will be difficult with several million service jobs still in flux. Even the re-opening process itself has proven to have fits and starts, with some states well ahead of others in that process and unease in some portions of the populace about getting back to “normal”.
The Fed has continued its dovish stance and has reiterated the timeline to remain at/near 0% short rates out to at least 2023. However, with the 10-year Treasury yield rising from 0.5% last March to 1.7% now, there is increased speculation that this timeline is untenable. This push up in yield has come from significant bond selling pressure, leading to that 3% drop for the Aggregate bond index and over a 13% drop for the 20+ Year Treasury index as investors retract their duration risk. High Yield bonds did provide some modest total return for the quarter as investors maintained a risk appetite for more income.
Looking ahead, scrutiny will remain elevated on the vaccine process, ongoing stimulus and spending package proposals, possible (and likely) tax rate changes, and the willingness of consumers to utilize this stockpile of cash. We are already seeing huge jumps in year-over-year demand for air travel, hotels, and restaurants. The next step will be to see if these levels are a temporary relief, or long-term trajectory that can bring us back to the economic pace prior to the lockdown measures. In addition, the specter of inflation will loom both in headlines and likely in some practical level. Inflationary pressures are normal and healthy, so some increase there is welcome to stave off a possible “stag-flation” scenario like Japan has experienced for decades. However, if signals persist of accelerated price pressures, the Fed may need to step in and take actions to alleviate that condition. If/when we do see tax policy changes, some areas of impact could include the corporate tax rate, income tax rates for “high earners”, capital gains rate again for higher income households, and the standard deduction and/or estate tax exemption. The impact of such changes are specific to each household, and appropriate planning steps should be considered.
We have identified key data points in recent market commentaries. While these metrics can continue to be difficult to rationalize in this unusual environment, here is where they stand:
These blogs are provided for informational purposes only and represent Cutler Investment Group’s (“Cutler”) views as of the date of posting. Such views are subject to change at any point without notice. The information in the blogs should not be considered investment advice or a recommendation to buy or sell any types of securities. Some of the information provided has been obtained from third party sources believed to be reliable but such information is not guaranteed. Cutler has not taken into account the investment objectives, financial situation or particular needs of any individual investor. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor's financial situation or risk tolerance. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.