Stocks continued their winning ways in the first quarter, thanks to the amazing progress in getting people vaccinated against the coronavirus, as well as efforts by the Biden administration to inject several trillions of dollars into the economy to help it continue to recover.
With vaccines available from three companies, nearly 3 million people are being vaccinated each day and nearly one-third of Americans (over 100 million) have now been vaccinated. Soon, over half of the population will be vaccinated. As a result, states have been gradually re-opening from the lockdowns of 2020, and investors can see a path to a “renormalization” of life again (no doubt it will be a new normal).
Amid the already encouraging recovery from the public health pandemic, the administration has pushed not one but two massive spending bills to turbo-charge the economy in an effort to ensure it doesn’t sputter in the latter half of this year. The first bill, which recently passed, called the American Rescue Plan Act (for more details click here), has been targeted to people most affected by pandemic-related lockdowns. The second bill, now working its way through Congress, calls for major infrastructure spending and is meant to provide jobs for middle-class Americans, as well as to push the economy into a more eco-friendly future.
It’s no surprise, then, that the stock market has gotten off to a good start to the year, given the prospects of an economy on the mend, people’s lives getting back to normal, and a boost from government stimulus. The participation has been fairly broad, including domestic stocks, both large and smaller companies, as well as foreign stocks.
A trend that began late last year continued in the first quarter of this year, that is, the return of the beaten-down areas of the market. Energy and financial stocks led the way, with technology stocks near the bottom, something we haven’t seen in several years. With the economy improving, investors are looking to own those stocks most poised to participate as the economy recovers.
It was not a good quarter for bonds, as rising interest rates pushed prices down on all high-quality bonds. In fact, it was the worst quarter for the Barclays Aggregate bond index since the fourth quarter of 2016. Bonds typically lag when the economy is recovering from a recession, but the recent pace of the increase in interest rates caught most observers by surprise.
The table below offers some perspective on how several of the most popular stock and bond indices fared in the first quarter.
Outlook for 2021
The investor optimism that began in the second half of 2020 clearly carried over into this year. Some analysts have argued that we could see strong gains for the year as the economy recovers and the continued government stimulus kicks in. Most stock market indices are at or near all-time highs. As trend followers, we see that as good news, and our portfolios reflect that optimism. All our strategies are at or near their full allotment to equities.
Most portfolios have an international fund, as well as small-cap funds, as this rally has broadened out. Nevertheless, because the U.S. seems to be further along than most other countries in returning to normal as a result of our rapid distribution of the COVID vaccines, FSA’s portfolios remain heavily invested in domestic funds.
With the trends as positive as they are, we are comfortable having a large allocation to equities in the portfolios. At the same time, we see signs that investors are becoming more complacent, that is, less concerned about the risks in the market. This could ultimately create the conditions that would lead stocks lower. A number of issues could create a headwind for stocks, but investors seem to be ignoring these issues for now.
Factors that may affect a change of direction include:
- Tax increases for corporations (proposed as part of the second stimulus bill)
- An increase in inflation (resulting from large budget deficits and extremely low interest rates)
Time will tell if these issues do indeed get traction and change the bullish vibe of investors. This is why we keep the FSA Safety Nets® in place as assurance in the event of a sharp change in investor sentiment. For now, however, the positive trend is our friend.
Portfolio Update
Keep in mind that because we manage clients’ portfolios individually, the holdings in your particular accounts may differ somewhat from the averages.
Income (Strategy 1)
As mentioned above, it was a very difficult quarter for high-quality bonds, as they experienced one of the worst quarters in five years. Fortunately, our bond funds were not invested in the areas of the market most negatively impacted by rising interest rates. In fact, each fund in this strategy outperformed the Barclays Aggregate index, with six of the nine funds finishing the quarter in positive territory. As of April, these portfolios held roughly 50% in high yield bonds, with 40% in other types of bond funds and less than 5% in money market funds.
Income & Growth (Strategy 2)
This conservatively balanced portfolio maintained its maximum equities allocation at 50% throughout the quarter. During the period, we reduced our position in convertible bonds while adding small-cap and international funds. As of the end of the quarter, the portfolios held 50% in equities and 45% in bonds, including 20% in high yield bonds and less than 5% in money markets.
Conservative Growth (Strategy 3)
This balanced strategy enjoyed a solid start to the year, helped by the small-cap and mid-cap funds which performed well. A further advantage was that our bond funds avoided the losses incurred by the Barclays index. During the quarter, we added an international fund to the portfolios, but the results so far have been mixed. At quarter’s end, these portfolios held 55% to 70% in equities, 20% to 30% in bond funds, and 10% to 15% in money markets.
Core Equity (Strategy 4)
Core Equity portfolios got off to a good start this year, helped by the small-cap fund, as well as the transportation and homebuilder sector funds. During the quarter, we trimmed back several of the “growth” funds while adding to more “value” funds. We also trimmed back the emerging markets fund as this area has recently come under some pressure. At quarter’s end, the portfolios held 90% in equities and less than 10% in money markets.
Tactical Growth (Strategy 5)
This active strategy posted solid results for the quarter, thanks in part to an eclectic mix of sector funds, including semiconductors, retail, transportation, leisure, and commodities. Small-cap and emerging markets funds helped the portfolios initially before fading later in the quarter. As a result, we trimmed back both of those positions in March. In addition, we trimmed back several of the “growth” funds and added “value” funds. Heading into the second quarter, these portfolios hold roughly 70% to 85% in U.S. equities, 5% in foreign funds, 5% to 15% in commodities, and 5% to 10% in money markets.
Sector Rotation (Strategy 6)
This high-turnover strategy continued its winning ways in the first quarter by rotating into the six leading sector funds each month. While the focus in 2020 was predominantly on “growth” sectors in 2020, this year has been more balanced between “growth” and “value” sectors. For the April rotation, the strategy holds transportation, industrials, basic materials, financial, real estate, and retail sector funds.
Please remember to inform your advisor of any changes in your life that could affect your investment objective and how we manage your money.
Ronald Rough, CFA
Chief Investment Officer
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