The Risks You Don’t See Coming
A hedge fund turned family office melt down, cited by traders as much larger than the implosion of Long‑Term Capital Management in the 1990s, snuck into the fold at the end of the final month of the quarter. While some large banks are calculating the extent of losses they incurred and select stocks were impacted, the tumult was far more muted than the collapse of the storied firm led by Noble Laureates which risked collapsing the financial market infrastructure back in 1998. While no one will be asking for sympathy for a billionaire estimated to have lost $8 billion in 10 days, the fact that our financial system never missed a beat (let alone required a Federal Reserve‑driven bank bailout like LTCM) was a real‑world stress test with a satisfactory outcome.
In yet another test, this time of our global trade system, a massive tanker lodged in the Suez Canal for six days blocked the critical pathway causing further supply chain disruptions. The impact of having a backlog of products sitting idle in hundreds of stranded container ships will be more visible in data releases in the coming months.
|Market Index Returns||March 2021||YTD 2021|
|S&P 500 Index||4.4%||6.2%|
|Russell 2000 Index||1.0%||12.7%|
|MSCI EAFE Index||2.3%||3.5%|
|Barclays US Agg. Bond Index||-1.2%||-3.4%|
|FTSE 3 Mo. T‑Bill Index||0.0%||0.0%|
Stock Market Review & Outlook
New Record Highs for Stocks a Year After Entering a Bear Market
Major U.S. stock indices broke into record territory, led higher by strong returns for the S&P 500 in March. The technology‑centric Nasdaq Composite experienced a deep pullback based on investors’ preferences shifting to more cyclical, value‑oriented stocks before the index rose back into modestly positive territory by month end. The Dow Jones Industrial Average closed above 32,000 for the first time, while a new 4,000 milestone for the S&P was breached shortly thereafter. What started as a rotation struggle between cyclical value stocks and high‑flying growth stocks turned into an “everything rally” across industries and sectors by month end. Underperforming sectors from last year (particularly Energy and Financials) are what have led the way thus far in 2021.
Earnings growth estimates are through the roof and, if realized, will go a long way toward justifying high‑flying stock prices and pulling down valuation multiples. Income‑oriented investors now have a viable alternative to stock dividends as the yield on the bellwether 10‑Year U.S. Treasury rose above 1.7% in March for the first time in a year.
|S&P 500 Sector Returns||March 2021||YTD 2021|
Economic Review & Outlook
Economic Growth Expectations are Fueled by Added Stimulus
The Organization for Economic Cooperation and Development (OECD) projections for economic growth have taken off, fueled by another massive round of economic stimulus. The latest package put money directly in the hands of consumers for a third time and provided further support to unemployed workers and aid to state governments. Estimates of economic growth in calendar year 2021 are now ranging from 5-7%. You would need to go back to the Reagan‑era 1980s to match GDP levels at the high end of the range. Solid manufacturing reports support the higher estimates, with the latest ISM Manufacturing report at its highest level since before many “meme stock” traders were born (38 years ago).
These lofty growth projections come at a time when over 20 million Americans are still receiving unemployment benefits of one form or another, although the latest payrolls report showed continued improvement in this critical area. Home prices have risen at the fastest pace in 15 years due to a lack of available supply of houses for sale. House price increases continue to meaningfully outpace wage growth. It has been reported that there are now more real estate brokers in the United States than available homes for sale.
Chart of the Month
Continued Stimulus Has Bolstered Consumer Confidence
Rising Consumer Confidence readings (as shown in the chart above) are a leading indicator, supporting substantial increases in economic growth forecasts.
The rapid pace of vaccinations against the deadly virus (more than 150 million doses in the U.S. according to the CDC at a pace of greater than 2 million per day) is shining an increasingly bright light on a future in which workers and consumers will be able to leave their homes on a more frequent basis, with slowly reopening offices, restaurants, and stores to go to. The unveiling of a proposed $2.25 trillion infrastructure spending package, adding to the record level of government stimulus, would be another tailwind to a recovering economy. Record levels of government debt to support these programs; however, runs the risk of wedging an already overloaded container ship into a narrow canal.
Like many, we will be awaiting details of proposed tax law changes expected to be a headwind to financial markets. Changes may come in the form of higher corporate tax rates, changes to the treatment of capital gains or estate taxes. The eventual details will be important to guide investment strategy.
Please reach out to one of your Account Officers or any member of our Executive Leadership Team to discuss topics raised in this letter or anything else we can be helpful with.