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Q1 2021 PastCast: A Season of Change

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Here’s all you need to know. (If you’re in a rush.)

  • The vaccine rollout rapidly accelerated, bringing increasing optimism to markets about a nationwide return to normal.
  • More fiscal relief hit bank accounts following the passage of an expected third COVID relief bill, which included (among other things), $1,400 per eligible individual and an extension of boosts to unemployment benefits.
  • US stocks keep reaching new all-time highs, despite pockets of extreme volatility and a shift in sentiment from high-growth technology stocks and into value-oriented materials, financials, and industrials.
  • Interest rates have started to rapidly increase as economic growth expectations in the US have improved and optimism continues to give investors confidence. But this rapid rise has caused some short-term ripple effects in certain sectors of the stock market.
  • One-year trailing returns for major stock indexes reached historic levels, as March marked the one-year anniversary of the bottom of the 2020 market crash. Since then, a broad basket of US stocks has risen over 70%, to set multiple brand new all-time *highs.

And now for the long(er) version…

Every January marks the mental “turning of a page”. Yet it’s hard to find many new years that have been anticipated quite like 2021. As the dust settled from an historically contentious election and the political mess that followed, focus on putting the pandemic behind us once and for all finally took center stage, both in the world of politics and of course, investing.

A season of welcomed change is upon us. And while optimism continues to grow by the day, new market trends are emerging and many short-sighted investors (day traders) that may have benefited from rampant speculation and “easy money” market environment last year, are likely starting to feel the pain of that approach in 2021. More to come on this…

Shots, shots, shots… Everybody!
As Americans, we tend to be an ambitious bunch, to say the least. As of April 2nd, Nearly 160 million vaccine doses have now been administered in the **US, blowing away the new administration’s initial goals set in January.

As expected, the broader stock market has seen US progress in vaccine distribution as a major catalyst for an extended march toward new record highs. Getting the vast majority of the population vaccinated ultimately means a much faster “return to normal”. And a return to normal is widely seen as a return to a pre-COVID earnings environment for much of Wall Street.

More fiscal relief
The American Rescue Plan of 2021 marked the third major bill to be signed into law that provides direct payments to eligible individuals and families. In addition to helping people, the bill provides much needed relief to struggling state and local governments, and businesses impacted most by widespread COVID restrictions of the last year.

Along with the acceleration of the nation-wide vaccine campaign, this third wave of fiscal stimulus has been seen as yet another catalyst for a widely anticipated economic boom in 2021 and beyond. While none of this should have come as a surprise to stock investors, updated growth forecasts and widespread upward revisions to earnings forecasts pushed major indexes higher for the quarter, despite some bumps along the way.

The start of a “great rotation”?
The transition to normalcy that many believe is underway right now, wasn’t very kind to technology stocks to close out the first quarter of 2021. Last year, as so much of the economy was shut down, technology stocks largely benefited from the crisis and led the overall market higher, with many of the biggest names doubling, tripling, and even more than quadrupling in market value in some cases, since the crash of last March.

So far in 2021, we’re beginning to see a shift taking place. Albeit a somewhat painful one for those chasing returns and piling heavily into the tech winners of 2020. Right now, it’s hard to say if this shift is just beginning or if it’s more of a head-fake to the market. Regardless, many investors who may have had some success chasing crowds and speculating on the momentum of individual stocks last year, are now being forced to reevaluate that approach.

The prospect of a return to normal, along with the fiscal stimulus being thrown on the fire of an already quickly improving economy, has reignited the sectors of the market that were largely abandoned in 2020. Railroads, retail, entertainment, travel, and financials in particular have come back strong to kick-off 2021. This makes a lot of sense, given that most of these are the areas of the economy that will most likely make money again very soon.

A drastically improving economic environment in which the potential of trillions of dollars in infrastructure spending may be on the horizon and a return to more regular (if not excessive in the short-term) levels of consumer spending, is very different from one where tens of millions are out of work, stuck at home, and hoarding any disposable income they are fortunate enough to still have.

As far as the overall market is concerned, this shift in outlook has led to a massive rotation out of the popular, innovative high growth stocks that powered the market higher last year, and into those that were left out of the fun. But sentiment change and a shift from growth stocks to value oriented stocks doesn’t quite tell the whole story…

Interest rates on the move
10 year treasury bonds might not be something you keep an eye on, but they are tracked very closely by professional stock and bond investors, for various reasons. At a high level, the “yield” or interest rate on US 10 year treasury bonds tends to be an indicator when it comes to forecasting economic growth in the years to come. When yields rise, it can generally be viewed as an expectation of good things to come in terms of economic growth.

On the other hand, rising rates (especially large moves over a short period) tend to send ripple effects throughout both the bond market and stock market, in the short-term, as bond investors see prices of any bonds they currently hold drop, and stock investors struggle to find meaning in the move.

When it comes to stocks, rising interest rates can mean higher costs to borrow money, which means high growth companies that rely on regularly raising and spending large amounts of capital to fuel revenue growth, suddenly have to rethink things.

In 2020, as the stock market was crashing in the Spring and things looked the most dire for the economy, 10 year yields fell to as low as 0.50%. As we enter the second quarter of 2021, yields have more than tripled, to about 1.70%. That said, this huge rise in treasury yields shouldn’t be quite so alarming, when you look at the bigger picture.

For one, 1.70% is almost exactly where rates were just over one year ago. And the yield on the 10-year was actually closer to 3% for much of 2018. When you think about it this way, it’s kind of hard to understand what all the fuss is about. But, those glued to financial markets on a daily basis are always looking for the next squirrel to chase.

(Source: CNBC)

So, while still near historic lows, the rapid rise (fueled mainly by economic optimism btw) has spooked many investors heavily invested in high growth technology stocks, leading to the increased volatility we began to see toward the end of the first quarter. As with anything in the stock market, it’s impossible to predict how long this interest rate anxiety will hang around. But what’s important to remember in the short-term, is that the stock market is often highly irrational and driven by emotion. For those in it for the long-run, an irrational market can present opportunities…

Takeaways for long-term investors
While it’s important for investors of all kinds to find context around daily market headlines, long-term investors with a disciplined, personalized strategy in place, shouldn’t be lured into the temptation to make adjustments to their approach based on any of this.

While certain types of stocks have seen huge declines and others are beginning to get some love for the first time since the pandemic rocked the global economy last year, picking and choosing individual stocks, sectors, or short-term trading strategies to rotate in and out of again and again, is not a recipe for success. For the most part, none of the specifics of these short term market trends should have any impact on your long-term strategy. In fact, this is exactly why broad diversification is so important when it comes to building an appropriate portfolio of investments for the long run.

At blooom, we don’t try to predict shifts in short-term market trends or try to time market movements. Instead we stick to a proven strategy that gives our clients broad exposure to both growth and value oriented stocks around the world whenever possible. And we do this with the understanding that things change often in the market, the precise timing of which is just not possible to predict.

Over time, this is the approach that’s been proven to work best for investors that are able to stay the course when it often seems the hardest to do so. The previous 1-year period ultimately became one of the single greatest reminders of this principle that we’ve ever seen.

As always, no one knows what truly lies ahead, but the outlook appears to be mostly optimistic,, at this point. If you’re a blooom client, our hope is that the strategy we’ve developed for you allows you to have one less aspect of your life to worry about as you dust off that wardrobe (or buy a new one) and prepare to brush up on those social skills again very soon. Speaking of social skills, feel free to test them out on our support team and advisors—we’re here for any and all of your awkward financial questions.

The information is provided for discussion purposes only and should not be considered as advice for your investments. Past performance is no guarantee of future results. Please consult an investment advisor before you invest.

*Based on performance of Vanguard Total Stock Market Index (VTSAX) through 4/2/2021
**https://www.bloomberg.com/graphics/covid-vaccine-tracker-global-distribution/ (updated: 4/2/2021)

Published on April 8, 2021