What a change in the markets from this time last year! Uncertainty over the effects of COVID-19 caused the S&P 500 to reach a low on March 23, 2020 that reflected a loss of about a third of its value from the pre-pandemic high. The broad market has now not only regained that lost ground, but added a 20% gain to it. To be specific, the S&P 500 is up 23.43% from February 20, 2020 to April 8, 2021. We continue to see record breaking highs in the broad market, and that pattern is unlikely to change anytime soon.
Last year saw growth-oriented stocks do well as technology-oriented companies looked to meet the needs of a populous quickly changing daily habits. We have now seen that cyclical activity come full circle as investors look for opportunity within value-oriented names. Many companies that were hit hard in sectors such as the travel industry are now trading at or above pre-pandemic levels as investors have factored in pent-up demand.
|Benchmark||2020 Return||2021 1st Q Return|
|Russell 1000 Growth||+37.07%||+0.79%|
|Russell 1000 Value||+0.18 %||+10.84%|
We have seen interest rates begin to rise as the economy recovers from pandemic related lows. As you can see from the graph below, interest rates remain historically low. However, changes do have effects. Refinancing of mortgages is no longer as attractive as it was a few months ago and financing new home purchases is starting to become more expensive. Bond rates have risen some as interest rates have risen, but most short-term savings vehicles like bank savings and money markets remain near zero. The outlook for future interest rate increases and the negative impact that will have on bond prices, has kept investors from shifting from dividend paying stocks to bonds. Measured increases in interest rates will allow the broad market to absorb this change in activity though, which is what we have seen.
Future rate increases are expected to stay at the slow, measured pace we have seen through the rest of the year. Slow changes will allow any sector losses to be offset by the strengthening of the broad economy as more establishments are able to safely resume normal business activities.
Current broad market valuations are a bit on the high side, but only marginally so. This leaves room for stock prices to continue to rise as the broad economy recovers from pandemic related losses. Similar to interest rates, we are seeing a rise in oil prices as more typical travel patterns resume. You may recall prices at the pump hovering around $4/gallon from 2012-2014 1. We are still well below that level at this time. As with interest rates, it’s a matter of how fast prices return to previous levels. The economy can absorb the slow, measured changes in oil prices we currently see.
Analysts are generally positive regarding the rest of 2021. The consensus for 2021 U.S. GDP growth is around 6.5%, which means corporate earnings growth should continue into early 2022 at the least. The corporate tax rate was 35% as recently as 2017, so the recently proposed rise to 28% in the midst of record earnings by many companies is not unprecedented and not likely to meaningfully curb economic growth. Taxes are also likely to rise on upper income earners (annual incomes above $400,000). The proposed federal infrastructure spending should take these new tax revenues and put additional money back into the broad economy via spending on materials and labor for the projects. The already significant 27%2 increase in money circulating in the economy should allow corporations to maintain current record profit levels. Overall, we agree with analyst forecasts for a favorable investment environment for this year.
The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.