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February/ March 2021 Market Update:
February 24th, 2021
As we head deeper into Q1, we wanted to provide an update on the market and our economic outlook going into Q2. Today, many investors are concerned about the high equity valuations in the broader market, the potential for a sharp increase in future inflation, and the recent increase in longer dated yields. We believe these concerns are normal in this stage of the economic and market cycle, particularly given the mountain of unprecedented monetary and fiscal support. Now that the better-than-expected Q4 earnings season is wrapping up it is “natural” for a pull-back in risk assets to ensue, in our view. Markets run up ahead of events such as earnings and tend to “exhale” some as concerns take over from the positive news on earnings. We are still focusing in four main positive tailwinds that should support our confidence in equities moving forward:
1. Don’t Fight the Fed: The twin engines of fiscal and monetary stimulus- At the time of this writing, Fed Chairman Powell completed the first day of his semi-annual testimony to Congress: His remark: “The economy is a long way from our employment and inflation goals” gave us assurances that the central bank will continue their support efforts for some time to come by keeping interest rates low as well as providing mass liquidity to ensure market stability.
From a Fiscal spending viewpoint, we expect Biden’s new Stimulus bill to equate to $1.7T (current proposal is $1.9T), with passage in the next few weeks.
2. Overwhelmingly large excess consumer savings- We have discussed this in previous letters, however the average American is relatively healthy financially compared to historical figures. From the economic shutdown, people have not been spending their money on vacations, eating out, and other forms of entertainment. As a result, checking and saving balances have never been higher. When the economy fully reopens, we expect pent up demand and spending will exceed normal levels for some time.
3. Positive profit and economic surprise- 95% of the S&P 500 market capitalization have reported Q4 earnings, with around 80% of the companies beating top and bottom-line Wall Street estimates. We expect this trend to continue from rapid reopening efforts as well as large stimulus from the Fed and Congress.
4. Covid-19 Data: Last week, J.P Morgan released an estimate predicting that the global pandemic could be over by the end of April. This would be significantly ahead of market expectations, which are currently at Q3. They arrived at this number by reviewing global vaccine rollout. They determined that on average, for every 10% increase in vaccines administered, new Covid-19 cases have declined at a rate of 117 per million people. Compare that to the median spread of 230 cases per million people. Assuming the pace of current vaccine rollout remains constant, as well as continued preventative measures remain intact, end of April estimate hold true.
Although our outlook is positive for the year, volatility will remain. Inflation data over the next few months will frighten many investors. Higher inflation figures are to be expected for two reasons. (1) we will be “rolling off” last year’s ugly Q1 2020 inflation numbers and (2) Money supply growth is about 25% year over year. Our prediction is that inflation will move upward and then plateau. The biggest takeaway is to maintain a long-term investment perspective in order to stay disciplined. If you do have questions regarding your portfolio or would like to rereview your investment allocations to ensure it aligns with your specific circumstances and risk tolerance, please do not hesitate to reach out to us to discuss. As always, we would like to thank you for your continued trust and partnership.