Market Update Q1 2021
The markets move higher.
Small and value stocks lead the way.
Energy stocks up, but so is the cost at the pump.
Inflation and higher interest rates now?
Will International markets outperform?
The 1st Quarter of 2021 has brought clarity into the uncertainty that ended 2020, putting the year of COVID-19 behind us. We entered the year with COVID vaccines available, businesses opening in most states, a new administration in Washington DC, and additional monetary stimulus injected into the economy. How have the markets reacted? Choppy, but trending higher. Small company and value stocks have led the way. Growth stocks have lagged this year with concerns of higher interest rates and a flight to safer investments with stronger yields. The energy sector has rebounded and is positioned as the top performing sector year to date. The growth in the energy sector has unfortunately translated into higher prices at the gas pump, decreasing the purchasing power of the consumer. Investors are optimistic that corporate profits will continue to rebound to pre-COVID levels. If earnings meet and exceed expectations, we could see a faster recovery.
The US economy is opening and with it the demand for goods and services are increasing. As a result, there has been speculation of inflation that started with a spike in the 10-year Treasury bond yield in late February. Rising interest rates typically lead to higher borrowing costs, which reduces the purchasing power of the consumer, thus slowing economic growth. Another consequence to the short term rises in interest rates was the selloff in growth stocks as investors shifted to higher yields, versus riskier growth stocks. Fed Chairman, Jerome Powell, has attempted to soothe the nerves of investors by emphasizing the prospect of a low interest rate policy until 2023. This, coupled with fiscal stimulus, is an attempt to kick start the economy while businesses reopen, and the workforce goes back to work. At present, with these factors, the concern of rising inflation and interest rates may be premature.
On the international front, developed countries and emerging markets have rebounded off last year’s lows, sparked by the undervalued cyclical nature of their stocks. We could see the overseas markets have strong growth in the post vaccine economy. Low interest rates, favorable stimulus measures, and a weak dollar, could help spearhead growth in the overseas markets this year.
As noted in our 4th Quarter 2020 Market Update, we remain hopeful for an accelerated economic recovery and continued rebound of the financial markets from the effects of the COVID-19 global shutdown. Central banks around the world remain on a tightrope walk, balancing stimulus to kickstart economies versus inflation caused by liquidity in the money supply. The ideal recovery is that stimulus measures and low interest rates move economies and markets around the world to recover, without the need for additional surgical stimulus measures and without creating inflation or an asset bubble. The outcome waits to be seen. We remain cautiously optimistic in the waiting of future outcomes.
We believe it is important for us to discuss your concerns and evaluate your risk tolerance so that we may invest accordingly. If you have any questions about how your portfolio is positioned, or how your personal financial circumstances could be impacted by economic and market conditions, please do not hesitate to give me a call.
Sincerely,
Scott Miller
Partner
