Quarterly Market Update 3.31.2021
The U.S. stock market was up 6.01% for the first quarter of 2021.
Volatility returned to U.S. equity markets as bond yields surged. Rising interest rates make it more expensive for companies to raise capital creating fear that future growth could be limited. The cause of rising rates is the fear of inflation, which is bad, and the anticipation of economic growth, which is good.
But the positive news outweighed the negative driving markets to hit new record highs. The rollout of the vaccine has far surpassed projections. More people in the U.S. have been vaccinated then tested positive for Covid. Although infections have ticked up, the rate of inoculation is vastly outpacing the rise in new cases. The passage of another $1.9 trillion in stimulus boosted equity markets, but also helped to push interest rates up. The Fed has committed to keep interest rates low for the foreseeable future and to continue to purchase bonds at the rate of $120 billion per month which means plenty of liquidity.
We also witnessed a see-saw between “stay at home” stocks and “re-open” stocks. “Re-open” stocks are value style companies which have been hurt the last year due to forced closures. “Stay at home” stocks are growth style stocks which are typically technology companies. Growth stocks have out-performed value stocks over the past several years - long before Covid. However, as the economy starts to fully re-open the “re-open” stocks are and will do very well. GDP growth the next two quarters is expected to be the best two back to back quarters ever recorded. However, technology “stay at home” stocks will continue to do well though. Our usage of the technology we have been forced to use to communicate over the last year will lessen, but people will continue to use them and these technologies will continue to evolve and develop.
U.S. fixed income markets were also rocked by rising interest rates during the first quarter. The overall bond market was down -4.25% for the quarter. Long term bonds were down over -10.00%, and even short term bonds were negative in the first quarter.
Please be aware that bond funds do not act like an individual bond. When an investor purchases an individual bond, they typically hold it until maturity, when they receive their initial investment back. Along the way the bond pays interest to the investor on a regular basis. The interest rate is fixed for the life of the bond.
Bond funds trade bonds. When interest rates rise, the value of bonds drop. This occurs because new bonds are issued at the new higher rates. Bonds already issued with the older, lower rates are sold at a discount to make up for the lower rate.
Historically instances of rising rates have been followed by bonds funds outperforming once the rising rates stabilize. The aggregate bond index experiences modest negative returns during these periods, on average -1.35%, however, over the course of the next 12 months returns are usually very strong.
Finally, as fiscally conservative advisor who has never been comfortable with amount of government deficit spending and debt – from both sides of the aisle, I am very uncomfortable with the amount of debt the government is accumulating now. Remember Greece? The current national debt is greater than our annual GDP growth. No amount of taxes can pay off the debt. It is mathematically impossible. When interest rise, and they will eventually rise, the interest payments on our debt will be the government’s largest expense. This will make it very difficult for the government to fund programs, like Social Security and Medicare, which are already experiencing the “death spiral”. Now, more than ever it is crucial for workers to save for their retirement years.
Please contact me with any questions.