“Well they call me the breeze… I’m just blowin’ down the road…”
This song probably wasn’t the most popular of the innovative catalog of legendary southern rock band Lynyrd Skynyrd, but it’s quite appropriate for the stock market right now. The first quarter of 2021 ended yesterday with the S & P 500 at an all-time high, the Dow Jones Industrials not far behind, and NASDAQ lagging in performance, but still positive for the year. Fixed income was slightly negative due to rising interest rates. Commodities were a mixed bag, with oil prices climbing and precious metals lagging. Overall, a solid quarter with volatility in a generally acceptable range. How do we account for this trend and where do we go from here?
As I’ve stated many times, Wall Street is a forward-thinking mechanism. Its lens is clearly not in the present, but 6-12 months in the future. The optimism of the first quarter is rooted in what pundits feel the world will look like toward the end of 2021. There are many factors for the positive outlook, not the least of which is the rapid rise in COVID-19 vaccinations. State and local governments have finally figured out most of the logistics for getting Pfizer, Moderna, and Johnson & Johnson products into people’s arms. We’re not out of the proverbial woods by any stretch of the imagination. However, on a personal note, I can tell you that I feel much better about regaining some semblance of normalcy than I did before I had my two inoculations. Almost everybody I’m speaking with is sharing the same sentiment.
While the bond market has seen a rather rapid increase in interest rates, the current levels are not untenable for continued equities improvement. One effect of the change in bond yields is the rotation out of non-dividend paying growth names that dominated the 2020 market into more boring income producing alternatives. Another reason for value stocks outperforming their growth confreres is the talk of a large infrastructure bill that the Biden administration hopes to pass this year. While I’m sure that there will be little or no bi-partisan acceptance of the plan, Wall Street feels positive that the initiative will move forward. This lends credence to the outperformance of industrials and cyclical stocks. Energy was actually the best sector over the past three months, but it makes up only 4% of the broader averages. What can derail the breeze from keeping its tailwind?
One headwind could be additional waves of the Coronavirus and its variations forcing states and countries to re-enter lockdown mode. France is already there, with Germany not far behind. International travel is basically closed to US vacationers other than Mexico and the Caribbean. This construct needs to change in a hurry. In addition, there is the specter of higher taxes on the horizon to pay for the infrastructure bill. Changes in individual, corporate, and estate tax rates could be deleterious to continued growth. I’m frankly not sure that there is the full compliment of 50 Democratic votes to ramrod tax increases into law, but the concept looks to be on the table soon. Finally, there are growing whiffs of inflation that could become problematical if the economic recovery overheats.
According to Birinyi Associates, April is historically a decent month for stocks, particularly after a solid first quarter. We’re closely watching the daily grind in Washington, the Federal Reserve, fixed income markets, and world affairs. There’s always the possibility of a garden variety correction to shake out speculative players, but we remain constructive about investments. The tax deadline moving back a month may delay folks funding retirement accounts, but that’s not honestly too worrisome.
In the meantime, please feel free to reach out to us at any time. RC, Ruth and I are here to discuss any thoughts that you have. In the meantime, baseball starts today and Keeneland opens tomorrow for horse racing. How bad can things be? Take care and stay safe… we look forward to talking with you soon.
The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification cannot assure a profit or guarantee against a loss. The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. Indices are unmanaged and do not incur fees. One cannot directly invest in an index.
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