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“The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself.”
The first quarter of 2021 was a positive one for the equity markets, while the fixed income markets saw declines due to a spike in interest rates. Like an ocean, which can look relatively calm on the surface but with significant undercurrents happening below, within the equity market, we saw a sizeable shift from “stay at home” stocks, which drove the market in 2020, into more “opening up” stocks. The same was true in fixed income, where highly rated government and corporate bonds declined more than lower quality and floating rate bonds.
We saw similar trends during late 2020 and early 2021, only to see them quickly reverse when new covid-induced lockdowns slowed the re-opening process. With vaccinations rising rapidly and warmer weather ahead, we are now more confident the trends under the surface will be more sustainable. As such, we have been adjusting portfolios accordingly.
One potential headwind is the risk of rising inflation. We are already seeing the bond market price in higher inflation via the rise in interest rates. Measures of prices on goods is clearly showing higher prices in a number of categories. There is a great deal of pent up demand in the economy, with consumers flush with cash from government stimulus payments and a strong desire to get out of the house. While the Federal Reserve has indicated it is not worried about inflation at the moment, if demand-driven inflation proves to be persistently strong, the Fed timing for policy liftoff may potentially be pulled forward. Much of the recovery in the financial markets since the Covid low last March has been driven by an extremely accommodative monetary policy by the FED. The market may not react well if the FED has to start to drain the “punch bowl”.
Source: Goldman Sachs GIR, Commerce Dept, Labor Dept. As of Mar 24, 2021 Relative to the December meeting, more Fed committee members expected higher rates by 2023 YE.
Looking ahead, the market has clearly priced in a high degree of reopening, as reflected in rotation from Growth into Value and Cyclical stocks and sectors, as well as interest rates and inflation expectations. Earnings season will kick off in a few weeks and all eyes will be on company commentary for the summer months as a true gauge of demand and whether the market has re-priced economically sensitive themes too aggressively or too conservatively. Stay tuned.
I consider myself a reasonable man and will therefore adapt according to what the world as we move forward.
P.S. Thank you for your referrals. They are making a big difference in my practice. Feel free to share my name with your friends on Facebook or LinkedIn.
I want to extend a special thanks to clients & colleagues who have recently referred us to family and friends: Christine H, Donna K, Eileen M, Peter B and Brian L
April Calendar of Events (comments and additions for future months are always welcome)
April 4th Easter Sunday – Have a blessed and Holy Easter
April 10th Christian’s wife Maecy birthday
April 12 & 13th We adopted our 4 legged children Coco (2010) and Buddy (2013). Sadly Buddy passed on 4/13/2019
April 15th Tax Day. Remember to make those IRA or Roth contributions. NOTE: Tax day extended to May 17, 2021
April 22nd Earth Day – let’s all recycle, turn out lights when we leave rooms, and do all we can for our environment
April 25th My daughter Satya’s birthday
Sources: Nottingham Advisors, Goldman Sachs, Federal Reserve Board
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