Vigilare Wealth Management 2021 Q1 Commentary
The markets had an uneven first quarter to start the year. Investment themes related to an economy in shutdown mode dropped from their highs, while reopening oriented companies started to gain momentum. Reopening optimism also impacted inflation expectations and the bond markets. Bonds had their worst quarter dating back to 1982.
The newly elected congress passed the 3rd major stimulus package (American Rescue Plan) this quarter totaling $1.9 trillion and bringing the total covid fiscal response to around $5.4 trillion. The magnitude of this response is more than the spending response for all recessions dating back to the 70s, combined. Only the level of deficit spending during WWII is on par. Looking ahead, there is also the possibility of a $2.3 trillion Federal Infrastructure bill later in the year.
The U.S. Federal Reserve (Fed) has been committed to keeping short term interest rates near zero for the foreseeable future. In addition, to keep longer term rates in check, they have increased their balance sheet of bonds from $4 trillion at the onset of the pandemic to now approaching $8 trillion. The Fed still views inflation increases as “transitory” and instead is focused on maintaining the employment recovery. The U.S. is still down more than 8 million jobs since the pandemic, many in the hardest hit sectors of the economy (E.G., leisure and hospitality). Our view is that the Fed will be uncharacteristically reluctant to tighten their policies, but we will be closely watching for cues signaling a policy change.
Given these stimuli commitments from Congress and the Fed, the upward market momentum could persist at least through the near term. This means that we may continue to see a rotation into markets that favor value/cyclical areas which benefit more from the re-opening of the economy. A strong reopening could lead to robust corporate earnings. This is not to say that the growth/disruptive sections of the markets which have done so well for the past few years should be avoided. We should however be more cautious in overexposure to super high-valued growth stocks, especially if they are strongly tied to the stay-at-home theme or if they have overly optimistic business models. Longer term, we do see incredible opportunities in disruptive technologies/business models which, as a result of the pandemic, have been showcased and become relevant today instead of what would have been years from now (there are many examples of this).
There is also an argument (ours) for more exposure in markets outside the U.S. It has been a while since global markets led the way, or even kept up for that matter. For the past decade our focus has been primarily in U.S. markets, but in a more optimistic re-opening scenario, non-U.S. investments could present some compelling opportunities. This is especially true if the dollar weakens against other major currencies.
The bond markets could continue to be challenged by a pickup in inflation. We do believe sharp rate spikes are less likely due to the Fed’s ability (and willingness) to intervene if necessary. A gradual increase in rates would be much healthier for the economy and for the stock markets to absorb. And as rates start to reflect higher inflation expectations, bonds will become much more attractive as a conventional buy and hold asset.
The U.S., U.K., Israel, and Chile are ahead of the pack in vaccine implementation worldwide. In the U.S. for example we are averaging over 3 million “jabs” a day which would infer having 70% of the population with at least one shot by early June (per CDC). Taken altogether this is very promising.
What are some risks that could impact progress of the recovery over near term (emphasize near term)?
- Resurgence in Covid variants for which current vaccines are ineffective
- Stimulus fatigue before full recovery
- Inflation expectations become untethered leaving Fed with limited options
- Aggressive tax hike and regulatory policy implementation
- Conflicts, E.G., China disputes regarding supply chains, technology, IP; or Russian provocation, ETC.
- Less willingness from investors to pay high market multiples due to a variety of potential reasons
We will be watching the re-opening dynamics closely. It looks encouraging so far. The inconsistent first quarter is a signal of the ebb and flow dynamics of the re-opening vs pandemic waves. Our view is the pandemic playbook is being shelved in favor of a broad-based “reflation” thesis which is starting to get some persistent traction. As always, we will make adjustments accordingly.
Thank you for your trust.
The Vigilare Wealth Management Team
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