Ron Rough, Chief Investment Officer, reviews the first quarter of 2021, as well as the current theme of our portfolios.
April Stock Market Update Transcript
Hello,. This is Ron Rough with a market update video for April. Hard to believe another quarter has already gone by. It seems like pandemic or not, time just keeps marching on, and at least for stock investors, this first quarter was a good quarter. If you look at this table, you can see that the S&P 500 was up 6%, the Dow was up 8, small cap stocks were up 13, foreign stocks did well. Really most stock investors did well in the first quarter. It was not a good quarter for bond investors. The Barclay’s Aggregate Bond Index, which is an index for high quality bonds, was actually down 3% which was one of its worst quarters ever and even certainly since, in the last 5 years, the worst quarter we’ve seen. So a good quarter for stocks, not a good quarter for bonds. If you’re a balanced investor, you’re somewhere in the middle there. So not bad at all.
If you look at the sectors that make up the S&P 500, interestingly, it was a very strong quarter for energy stocks, up almost 30% in the first quarter, and, interestingly, not a very good quarter for technology stocks which have been the leaders for the past 3 or 4 years. They were up less than 3%. And overall, what was interesting is value stocks in general, energy, financials, industrials, all of those had good quarters, which is a bit of a reversion from what we’ve seen over the past several years. Now, if we look at just the S&P 500, we are more technically oriented, so we tend to look at price charts. So this chart is the S&P 500 going back two years, and we have a trend line underneath it, so you can see the trend is definitely up. And if you look at the S&P 500, you see we had that big drop in March of last year, February/March of last year, and since then, it’s just been this very steady recovery to new highs. So from our vantage point, this type of pattern is very positive, and our portfolios reflect that. Our portfolios are, for the most part, fully invested. And it’s been, most of the indexes look this way.
Now what themes make up our portfolios now? There’s three basic themes that we’re focusing on. Number one, small cap stocks. These are funds that tend to invest in smaller companies. Those are the kind of companies that are recovering now that the economy’s getting back on track. Secondly, there’s been this gradual shift from growth stocks, like technology and healthcare, over to value stocks, like energy, financials, industrials. So that shift is continuing. And then thirdly, we’ve begun to stick our toe in the water with international stocks. And this is the first time in a while, but as the global economies recover, then that’s been benefiting the foreign stocks as well.
Overall, I would say the theme is really around, if you look at our portfolios, the theme is really around the gradual reopening of the economy. As the vaccines get widely distributed and hopefully the pandemic begins to fade away, the stocks that will most benefit as the economy recovers, that’s what’s showing up in the portfolios. What’s interesting is why the market just continues to march higher. It’s interesting because, number one, the Federal Reserve has kept interest rates historically low. They’re still close to 0. The Fed was on 60 Minutes over the weekend and reinforced that they have no plans to change that, and they want to keep as much liquidity flowing through the economy as they can. And that is just a massive tailwind for the economy and for stocks.
And then secondly, and just as impactful, the federal government has passed or has three massive stimulus bills that have been coming through the system. The first one done under President Trump, the CARES Act, was almost $2 trillion. The second one that was just passed this year under President Biden, it was another couple of trillion, the American Recovery Plan Act. And then the third one is this infrastructure bill that’s still being worked on. So that is a massive amount of money, again, flowing into the economy, and some of that money will always find its way into the stock market.
Then thirdly, obviously, the vaccines are getting widely distributed. Probably a third or more of the population has been fully vaccinated, and that’s on a path to get to 50% pretty soon. At some point, we will be at a place where there’s herd mentality; herd immunity I mean, and at that point, everyone will feel comfortable getting back to normal or at least a new normal.
So at this point, is it smooth sailing from here? Well, number one, the infrastructure bill hasn’t been passed yet, so we’re not quite sure what will ultimately get passed regarding this new infrastructure bill. Secondly, as part of the infrastructure bill are the prospects for higher taxes – corporate and for wealthy Americans. Certainly, that can have an impact on corporate earnings which could impact the stock market. And then thirdly, investors are complacent. People feel very comfortable now.. It seems to be this notion that we’re going to have a repeat of the roaring 20s. And once all the investors are on one side of the boat, the bullish side, then you run the risk of flipping the boat over. And so, even though our portfolios are fully invested and the trends are positive now, we are very sensitive to the fact that that can change quickly, and we’ve got our exit strategies in place so that if anything happens, certainly in the second half of this year, we can react quickly and keep the portfolios out of trouble.
So that’s all for this month. Until next time, thank you for watching.
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