Q1 Market Perspective

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Happy Coronavirus Anniversary!? One year has passed since the novel coronavirus, Covid-19, was disclosed to the world, launching an era of quarantines, masks, and uncertainty. With the onset of related uncertainty, financial markets responded, ironically, as expected. Stock market volatility ensued as limited, changing information was digested in rapidly declining stock prices (and increasing high-quality bond prices…). The resounding question was whether or not this financial recession would be different. Many, including the media, opined on the reasons this time would be different, but we didn’t fall into that trap. As time marched on, the world learned and adapted, and we stuck to our plan—or better said, 994 Group clients stuck to their plans. The causes of recession are often different… geopolitical unrest, market bubbles, financial system failure… But regardless of the recession or its cause, the human spirit endures with resiliency and positive momentum.

So, let’s reframe the conversation. 2020 delivered the best single-day return in the stock market since 1933, when the DJIA® increased over 11%. Global healthcare systems rallied to create multiple vaccines at a historic pace allowing for a rapid approach toward herd immunity. Business owners across the globe adapted to work-from-home environments, concluding the year with a positive forward-looking outlook. Perseverance and agility sustained us through the worst of the pandemic. So, while masks and quarantines are still a part of daily lives, the disruptive fear of the great unknown has substantially passed, and the road to recovery is well on its way. The following points provide more context for the recovery.

• Small cap stocks and value stocks led the way in Q1 as interest rates increased and the broader economy continued its recovery.
  • U.S. Small Cap (Russell 2000): 12.69% Q1
  
  
  • U.S. Stocks (S&P 500®): 6.17% Q1
  
  
  • International Stocks (MSCI ex US Index): 4.04% Q1
  
  
  • Emerging Market Stocks (MSCI Emerging Index): 2.29% Q1
  
  
  • U.S. Bonds (Bloomberg Barclays Aggregate Index): -3.37% Q1
  
  


• The federal debt has ballooned to previously unseen highs, yet servicing the debt is more affordable than you might think. As previously noted, our federal debt is a major concern. But, debt itself shouldn’t be feared. Required interest payments as a percentage of gross domestic product (GDP) are lower now than they were in the 80s and 90s. A more concerning risk at the macro level is a dramatic cut in spending to reduce the debt. This solves one problem, but creates an even bigger one by threatening the largest component of GDP (70%), consumer consumption. So, while we are not advocating for unrestrained spending, the overall health of the economy must be prioritized along with the federal budget.


• Inflation is on the horizon, so root for the Goldilocks version (not too high, not too low), which may be a GOOD thing. The amount of money circulating within the economy exploded in 2020. As a result, recent headlines fanned the flames of worry over inflation. We don’t share that concern, and actually think a little inflation is beneficial. Inflation would signal that the economy is at or near full employment, which would also signal a full recovery from the COVID recession. It also signals a pending increase in interest rates, which gives the Federal Reserve more breathing room to manage future crises. (You know this isn’t the last one, right?) But most importantly, inflation with full employment means the national debt can begin to be absorbed without major changes to federal spending.


• The employment picture is improving, but the redistribution of jobs and associated wealth is worrisome. Unemployment reached 14.7% in 2020; it’s receded to 6% as of March. That’s a remarkable top-line improvement, but the recovery has not been equal among genders and races. For example, the loss of women in the workplace has proceeded at an alarming rate. The United Nations published a report demonstrating the pandemic has set back women’s progress toward wage equality by 26 years. Women of color were impacted even more than white women. In December 2020, women accounted for 100% of job loss, while men gained jobs. This happened even as women are outpacing men in college education and had previously overtaken the workforce majority. Social issues aside, women drive 70-80% of consumer spending decisions, so in consideration of consumer consumption representing 70% of GDP, the negative impact is obvious if not immediately calculable.


• So, is it time to sell, or time to buy? We think it’s time to stick to your plan absent changes to your personal headlines. From 1926 to 2018, after periods in which the S&P 500® reached new market highs, the following 12 months averaged a return of 14.1%. Conversely, after a period in which the S&P 500® weathered a 10% decline, the following 12 months averaged a return of 11.3%. Both scenarios look pretty good.

The problem with trying to make decisions with a crystal ball is that it usually just results in walking on shards of glass. We evaluate current events, not so we can make decision based on what might happen next, but rather to provide context for what they mean… and what they do not. We cannot predict the future; we can only focus on the things we can control. So, stick to your plan, your budget, your savings, your joyful life! And, when you experience one of life’s inevitable changes, we’ll be ready to make adjustments with you!

Sources: First Trust Monthly Talking Points March 2021, First Trust Unemployment Watch April 2021, cnbc.com ‘A year ago, women outnumbered men in the workforce, not they account for 100% of jobs lost in December’ January 11, 2021, Dimensional Fund Advisors, Finance.yahoo.com, Morningstar.com

Disclosure: This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.

Index Disclosures:
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.

Index Definitions:
Barclays U.S. Aggregate Bond: The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index of fixed rate debt securities rated investment grade or higher by Moody’s, Standard & Poor’s, or Fitch rating services. All issues in the index have at least one year to maturity and an outstanding par value of at least $25 million to $1 billion based on the type of security. Indices are not available for direct investment and do not reflect any fees that may be charged.
S&P 500®: The S&P 500® index is an unmanaged index of 500 companies used as a representative sample of the United States economy. The S&P 500® index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.
MSCI Ex-US: The MSCI Ex-US index is an unmanaged index used as a representative sample of the global developed economy outside of the United States. The MSCI Ex-US index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.
MSCI Emerging Markets: The MSCI Emerging Market index is an unmanaged index used as a representative sample of the global emerging market economy outside of the United States. The MSCI Emerging Market index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.
DJIA: is an unmanaged index of 30 companies used as a representative sample of the United States economy. The DJIA index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.
Russell 2000: The Russell 200 index is an unmanaged index of the 2000 smallest companies in the Russell 3000 index. The Russell 2000 Index is used as a representative sample of the small companies in United States economy. The Russell 2000 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.