I think that you will all agree that we are living in most interesting times. I never remember myself a time in which our history was so full, in which day by day brought us new objects of interest, and, let me say also, new objects for anxiety. (Joseph Chamberlain, British statesman, 1898)
How was the quarter? : The rollout of COVID-19 vaccines, continuing large-scale fiscal stimulus, and central banks’ highly accommodative monetary policies have bolstered investors’ confidence in a rapid economic recovery and led to market gains. There was some rotation away from 2020 winners like tech into value and small cap stocks. As evidence of this new twist, the tech-heavy NASDAQ 100 only returned 1.8% while the Dow Jones Industrials, dividend stocks (Vanguard High Dividend Stock ETF) and small cap stocks (Russell 2000) earned 8.5%, 11.2% and 12.7%, respectively.
Objects of interest: SPACs, Reddit, Robinhood, GameStop, Bitcoin and Archegos all made for captivating headlines. Economically speaking, the March jobs report blew past expectations as payrolls rose by 916,000, while the latest report on U.S. manufacturing gave the highest reading since 1983. GDP is closing in on its pre-pandemic high and growth is expected to exceed 6% in 2021, while corporate profits are set to rise more than 20%. Consumers, who have been biding their time during the pandemic, have accumulated excess savings of an estimated $1.5 trillion that could release a wave of pent-up demand later this year. If air travel is any indication, in March 2021 the TSA screened the highest number of passengers in a single day since March 2020.
Objects of anxiety: One object of anxiety is not new – recent market exuberance. There are legitimate questions regarding whether it has been rational or irrational. The market’s recovery since last year is supported by the factors mentioned above. However, other metrics such as the cyclically adjusted PE ratio (CAPE) and the Buffett Indicator (market value to GDP) show the S&P 500 at levels equal to or exceeding those of the tech bubble. A second and newer object of anxiety is inflation. With massive government stimulus, easy monetary policies, and substantial economic growth, the prospect of higher inflation is rising. Unchecked inflation erodes purchasing power and leads to countermeasures that can be recessionary.
What to do?: Investors should gird for a more challenging year ahead, while acknowledging that asset price cycles are inevitable. In fixed income, investors should consider keeping duration at the low end of target ranges and holding some inflation-protected bonds. On the equity side, one should balance growth with value and consider commodity-based equities, liquid alternatives, and private equity to sidestep any potential short-term speed bumps.
The views expressed represent the opinion of Veritable. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Veritable believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Veritable’s view as of the time of these statements.
Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements.
Past performance is not indicative of future results. An investor should not assume that the future performance of any specific investment or investment strategy would be profitable or equal to past performance levels. All investment strategies have the potential for volatile returns and loss of capital.