Market Overview
Stock continue to climb and climb as expectations for a post-pandemic return to normalcy grow. US and international stocks, large and small have gained nicely over the last three months. Returns over a twelve month period are nearly comical as they coincide with levels close to the March 2020 pandemic lows. Small caps in particular have continued their leadership since late 2020. Bond yields have been moving higher since mid 2020, pushing prices down.
Large market gains have brought back discussions of bubbles and fear of declines as ever. I’m not going to even try to define or debate if this is a bubble or not, since that sort of thing is rarely productive. What I do know is that this is what markets do. They go down a lot (remember that?) and sometimes stocks go up a lot. Calendar years with big swings in market prices are much more common than calendar years with gains of 7-10%. I do not know if markets will go up or down from here, and no one else does either. No one predicted BOTH that stocks would fall 30%+ going into March 2020 and then would subsequently shoot past previous record highs in less than a year. The future is unpredictable and that is what makes it the future. Our job is to decide how we are going to manage our portfolios in an unpredictable world – that is the only kind of world we get to live in.
So we’ll go back to the plan. The plan is to be long-term investors in an uncertain world. To stick with a diversified strategy and hold to it. To rebalance when things get well out of range of how we said we would invest, and to move on with life. To take money from the portfolio as needed according to the plan, or add money to the portfolio according to the plan. Not to “wait and see” what happens or try to do these things when you feel warm and fuzzy about them. When markets are up or down (eg, always), there is always a reason or an excuse to deviate from your plan. Wait for the election, the earnings report, the “bounce” or the “pullback” that may or may not materialize. Quit wasting your mental resources on silly speculation and go back to your strategy. Your strategy is only of value if you execute it regularly. Otherwise it is just another wasted exercise.
| 1Q 2021 | 1 Year | 3 Year | 5 Year | |
| Large Cap US Stocks | 5.77% | 53.71% | 14.58% | 14.04% |
| Small Cap US Stocks | 12.70% | 94.85% | 14.76% | 16.35% |
| International Equity | 3.48% | 44.57% | 6.02% | 8.85% |
| EM Equity | 2.29% | 58.39% | 6.48% | 12.07% |
| Aggregate Bonds | -3.37% | 0.71% | 4.65% | 3.10% |
Index performance is provided as a benchmark. It is not illustrative of any particular investment. An investment cannot be made in an index. Past performance is not an indication of future of results. S&P 500, Russell 2000 Index, MSCI EAFE Index, MSCI EM Index, BBgBarc US Agg Bond Index. Returns as of 3/31/2021.
Economic Update
The last quarter was solid for the global economy as we slowly crawl our way out of the pandemic. By nearly all measures, things are headed back up, though still fairly far from pre-pandemic levels on an number of accounts. Fourth quarter 2020 GDP grew 4.3% over the previous quarter, a strong reading.
The US labor force is healing as initial unemployment claims fall along a long trajectory. The most recent reading was 684,000, a decrease of over 90,000 from the previous week. This is still far off the higher levels of 2020 but still above anything that we saw in a healthy economic environment like the one we were in before the pandemic. The US unemployment rate is now down to 6.2%.
Another sign of improving economic growth comes from the manufacturing sector, where real gross output grew 6.7% in the fourth quarter of 2020. Again we are still below pre-pandemic output but quickly returning to healthy levels.
On the individual household side, many signals look strong. Household net worth has boomed as real estate prices and public stock markets have gained rapidly since the pandemic lows.
Personal income has suffered during the pandemic. The measure below does not include receipts from stimulus payments in the last year, so we can have a real picture of personal income. Levels are off from pre-pandemic highs and have stabilized but the trend has been weak of late.
Disposable personal income, which does include stimulus payments, has been trending positive. Note that this does not include planned stimulus payments in early 2021.
Real estate has been an outlier throughout the pandemic, as interest rates hit rock bottom in 2020 and limited inventories have pushed nationwide home prices skyward. The ongoing normal trend of prices growing with inflation and population has boosted higher in the last year. In January, prices were up 11.2% from the previous year. Much of this has been driven by limited supply as inventories reached record lows in March of 2021.
In other positive news, the vaccine rollout in the United States is gathering steam. Through March 30th, over 56,000,000 Americans have been fully vaccinated, representing 21% of the adult population. Nearly 50% of the at-risk population over age 65 has been fully vaccinated. 2.5 million doses are now being administered on an average daily basis.
Tax & Policy Updates
The biggest news out of Washington this quarter was the passage of the American Rescue Plan Act of 2021, the most recent stimulus package to combat the effects of the pandemic. Signed into law by President Biden on March 11th, the bill includes many familiar line items, similar to what we saw in bills from the previous administration. The key parts include:
- $1,400 direct stimulus payments to individuals. This payment will phase out for individuals with income over $75,000 and joint filers with income over $150,000.
- Expanded unemployment benefits with an additional $300 per week supplement provided through Labor Day. The bill also makes the first $10,200 in annual unemployment benefits non-taxable.
- Multiple small business provisions, including specific grants for restaurants and bars, additional funds for Emergency Disaster loans and additional funds for more rounds of Paycheck Protection Act loans.
- Housing assistance in the form of new funds for rental assistance programs and funding for homeowners at risk of foreclosure due to pandemic related job loss.
- There are also some significant tax law changes in the bill. The Child Tax Credit was expanded to $3,000 per child ($3,600 under age 6), again with phaseouts at incomes of $75,000/$150,000. The Child and Dependent Care Credit was also expanded, making it refundable for $4,000 per individual.
It is possible that we could see additional major tax and spending legislation in 2021, but no actual bills have been written at this time. We will keep a sharp eye on any legislation that comes to pass and consider how it may affect any investors personal financial plan.
Bason Asset Management 