Stock markets worldwide have come a long way from the lows reached just over 12 months ago. When we wrote our quarterly letter a year ago, we did not know whether the nascent rebound in stock prices would persist, and certainly not at the magnitude it has. The S&P 500 Index exceeded its February 2020 high just six months later and is now up over 80% (including dividends) from the March 2020 bottom. Stock market volatility, while still modestly above pre-pandemic levels, has subsided dramatically, and recent economic data suggests that the U.S. economy is regaining its footing.
While we take comfort in the generally improving economic data, the accelerating vaccine rollout, and subsequent reopening of the U.S. economy, we realize that the recovery still faces challenges, including an uncertain labor market, the potential for inflation and interest rates to rise more quickly than expected, and unpredictable swings in GDP growth. We expect news over the next several months to be a mixed bag of positives and negatives as the economy returns to something approximating “normal.”
Asset class returns for the first quarter were as follows:
|Fixed Income||Barclays U.S. Govt./Credit—Int.|| |
|Large U.S. Stock||S&P 500|| |
|Small U.S. Stock||Russell 2000|| |
|Foreign Stock||MSCI ACWI ex-USA|| |
|Real Estate Securities||S&P Global REIT|| |
This recent run in the U.S. stock market has been one of the best one-year stretches for the S&P 500 Index since the 1930s. Thus far, the recovery has had two separate and distinct stages. Early on, large-cap growth stocks led the market, as the sudden “stay-at-home economy” disproportionately boosted these companies. Technology stocks benefited tremendously, and their outsized gains masked weakness in other areas of the market. The well-known “FAANG” stocks, consisting of Facebook, Apple, Amazon, Netflix, and Google (Alphabet), along with other large growth companies such as Tesla, Microsoft, and Zoom, mostly outpaced the S&P 500 Index through the first six months of the pandemic.
Last fall, however, when the efficacy of Moderna’s and Pfizer’s vaccines was announced, anticipation of a sooner-than-expected economic rebound caused a broader upturn in the markets. Financial institutions, energy producers, and smaller U.S. companies, whose profits are more correlated with a reviving economy, have led the way so far in 2021, as increasing vaccine supply rolls out across the country and the U.S. government continues to provide massive financial stimulus. Interestingly, these broader stock market gains are now offsetting some weakness in technology stocks, which have been increasingly volatile as interest rates rise and valuations adjust. Value stocks, which are typically categorized by their relative low price-to-book or price-to-earnings multiples, have begun reversing a period of underperformance relative to their growth stock peers. In particular, small U.S. value stocks (represented below by the Russell 2000 Value Index), have made a roaring comeback, more than doubling the return of the S&P 500 Index since early November.
Although the value of diversification should not be judged over short periods of time, the last six months illustrate just how quickly returns can be missed if an asset class is not effectively represented in an investor’s portfolio. The “investing tide” can change quickly and dramatically. Long-term investment returns come from many parts of the global financial markets, and the most reliable solution is to maintain continual exposure to a broad basket of asset classes. Portfolio diversification remains an essentially zero‐cost way to manage total portfolio risk. We believe that the key to long‐term investment success is maintaining broadly diversified portfolios in the most cost effective and tax efficient manner, considering each investor’s willingness to accept risk and their need for liquidity.
Congress passed, and President Biden signed into law, an additional “Stimulus Bill” in early March. The relief package, one of the largest in history, is intended to further stimulate the U.S. economy by providing financial aid to individuals, families, small businesses, and state/local governments. Below is a summary of some of the provisions for individuals and families included in the new $1.9+ trillion package:
This list is not exhaustive and there are numerous provisions in this wide-reaching bill. We encourage you to reach out to your Lead Advisor or tax professional to discuss any potential planning opportunities for your specific situation.
Finally, the Securities and Exchange Commission (SEC) requires all registered investment advisors under its supervision, including Dowling & Yahnke, to provide clients with an annual summary of specific and significant changes that have occurred within the past year. As such, we will provide our ADV Part 2A, Item 2: Material Changes in an upcoming communication. A complete copy of our most recent ADV is available upon request or may be obtained by the FORM ADV (PDF) link in the footer of our website.
Thank you for your continued trust and support. We hope your year is off to a great start and invite you to contact our team with any questions or concerns regarding your finances.
Dowling & Yahnke Wealth Advisors