"I will tell you how to become rich, Close the doors. Be fearful when others
are greedy. Be greedy when others are fearful." - Warren Buffet
LOOKING BACK
The first quarter started on a bumpy note as investors grappled with a slow national
vaccination rollout, political uncertainty, and worries the economic recovery may take
longer than anticipated. Sentiment turned more positive, however, as a stream of
upbeat economic data and solid fourth quarter corporate reports powered U.S.
equities to strong gains in the first quarter of 2021.
Of the companies in the S&P 500 index, 79% reported a positive earnings surprise,
with just 17% reporting earnings below consensus estimates. Markets were also
aided by a decline in new COVID-10 cases and hospitalizations, the passage of a
$1.9 trillion fiscal relief bill, and the Federal Reserve's reassurances that it would
maintain its near-zero interest rate policy and monthly bond purchase program.
The stock market climb had some hiccups over the interpretation of comments by
Fed Chair Jerome Powell, inflation concerns, and a sharp and rapid rise in bond
yields. Technology shares and those of other high-growth companies experienced
some of the biggest downdrafts as investors appeared to rotate into more economically
sensitive stocks. Markets advanced higher, but trading turned choppy as the quarter
ended. Traders digested the outsized gains from the pandemic lows, and institutional
investors and pension plans underwent their quarterly rebalancing. Nevertheless,
stocks closed near their highs as the quarter came to a close.
LOOKING FORWARD
Expectations for a robust economic recovery continue rising for several reasons,
beginning with the accelerating vaccine campaign. Nearly 30% of the U.S. population
has already received at least one vaccine dose. And if the current pace of vaccinations
continues, 75% of the population could have at least one dose by early summer
according to The Wall Street Journal.
With more of the population freed by vaccines, government restrictions can ease
further, and excess savings could unleash pent-up demand from consumers who
are eager to spend on travel, leisure, and other discretionary purchased. Meanwhile,
President Biden recently unveiled a $2 trillion infrastructure plan, adding to the trillions
of government stimulus already spent to support the pandemic-hit economy. Additionally,
the Federal Reserve continues pledging to keep its easy-money policies in place,
including holding short-term interest rates near zero through 2023.
Another massive spending bill may cut two ways: On the one hand, the market may
welcome it, seeing it as a driver of additional economic growth. Alternatively, an increase
in borrowing may result in higher bond yields and the market looks to absorb the new
supply of Treasuries and fuel already simmering fears of the elephant in the room...higher
inflation.
NOW WHAT
Stay the course.
It goes without saying that rising markets are positive for investors. However, as with
all things, maintaining balance is the key to long-term success. Just as investors often
find it difficult to stay invested when markets pull back, many also find it challenging to
stay focused when markets are roaring. After all, it's human nature to chase returns
and to be afraid of missing out. Even when investors intellectually understand that
market gains cannot accelerate forever, there can be emotion-driven excuses for why
this time is different. This is true even for investors who may have been fearful of
returning to the stock market just a year ago.
If history teaches us anything, it's that staying invested with a well-thought-out portfolio
and financial plan is the key to long-term success. Doing so helps investors to capture
the upside as markets rise over long periods while protecting from downside when they
inevitably decline over shorter ones. Just as a sensible sedan, SUV or minivan may
not be able to keep up with a race care on an open highway, they will handle the inevitable
potholes and traffic jams much better. And, in the end, they will reach their destinations
in a safer, more comfortable manner.
Today, there are three key reminders for investors as markets continue to reach new
all-time highs. First, recent surveys of investor sentiment suggest that bullishness is now
near historic levels among everyday investors - a stunning reversal from a year ago. That
this is occurring in lockstep with rising markets should be no surprise. Investors - fueled
by past returns, media coverage, low interest rates and interesting new assets - are
seeking new ways to invest.
However, history shows that investor sentiment is often a contrarian signal - a sign
that investors are focusing too much on return and too little on risk. This was certainly
true during the dot-com era and the housing boom, but has also taken place periodically
over the past decade. While this is by no means a timing indicator - markets can rise
much longer than many expect - it is a reminder for long-term investors to avoid being
distracted from their plans.
Second, while many fundamental factors have continued to push markets higher,
investors should not expect markets to accelerate forever. At this point, the expectation
for GDP and corporate profits to recover later in 2021 is widely understood and priced-in.
Broad market valuation levels remain close to dot-com era highs based on these
expectations, but can improve over time as the recovery advances. In general, there are
no significantly undervalued sectors across the stock and bond markets. This further
emphasizes the need for discipline and risk management.
Third, although the broad market continues to climb higher, the sectors and areas driving
this have changed over the past several months. Areas such as small caps, value stocks,
energy, commodities, financials and more have surged during the recovery after falling
behind technology and growth stocks last year. Thus, it's important to not only focus on
the headline index numbers but to understand what is driving performance beneath the
surface. It's also important to focus on how each of these areas fit into a well-constructed
portfolio, perhaps with tilts to asset allocations.
Thus, investors ought to stay focused in the months to come. Stock market pullbacks
are impossible to predict but are inevitable nonetheless. The goal of long-term investors
is not to swerve in and out of markets based on past returns, but to stay invested in an
appropriate portfolio through both good time and bad.
FINAL THOUGHTS
The bottom line? Although the rising market is positive, investors ought to remain
disciplined as the economy and corporations continue to recover.
I don't know which sector will work best in 2021, or where the economy, inflation,
and interest rates will head. We can't control those things. However, we can stick
with an investment strategy that suits our goals of long-term capital preservation
and stable, growing income.
Executing our strategy doesn't require identifying which stocks will go up the fastest
or making calls on the next big investing trend. We just must own a diversified group
of boring, time-tested businesses that are simple to understand, having staying power,
and can steadily grow their cash flow over the years.
Projecting the future direction of the market is difficult in any environment, but expect
that investors will be paying close attention to several key market levers going forward,
namely, corporate earnings, vaccination progress, economic data, and fiscal and
monetary actions from Washington and the Fed, respectively.
With investors' risk appetite running high - fueled by robust stimulus measures
unleashed on an unprecedented scale - I believe a cautious, practical approach is
especially prudent in today's environment. As always, we will stay the course and
do our best to keep you on top of the issues that matter across your portfolio.
If you have any questions or would like to discuss anything in this update or any
other matter, please feel free to give me a call. As, always, I'm honored and humbled
you have given me the opportunity to serve you.
Sincerely,
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April 19, 2021
