Returns for the major stock indices for 2021 and the current bond and money market yields are as follows:
|Dow Jones Industrial Average||7.76%|
|Fixed Income Yields||1 year||5 year||10 year||30 year|
|Fidelity Government Cash Reserves Money Market Fund||0.01%|
The first quarter of 2021 is off to a good start for the equity markets. First and foremost, COVID cases are falling precipitously, and the vaccines are proving to be a huge success. Though the numbers seem to vary, we believe that between the vaccines, the number of counted cases, and the CDC’s estimated unreported infections, nearly 70% of Americans have some form of antibodies. And though we certainly do not know the final outcome of the new strains or whether the vaccines will permanently end all variations of the virus, we believe the worst is most likely behindus and that herd immunity will soon be here in 2021; and the great re-opening of America is underway!
While we remain optimistic for the year ahead, we believe as long-term investors, it is constructive to reflect on the last year. We all remember too well how we felt one year ago, when the world nearly stopped in the uncertainty of the virus. In the depths of the fear, no one knew how severe the virus would be and to what extent the economic engine would slow. This fear caused panic and led to extreme behavior, leaving some companies booming while others ground to a halt. The world was in disarray, and markets never stopped discounting and adjusting for every possibility. Amid the uncertainty, we wrote: The world is aligned and we are very confident that solutions are coming, from testing to therapies to vaccines. This problem, while tragic, is temporary and will subside. We urge patience, as this setback may not be fixed as quickly as we wish, but ultimately, we will prevail, the markets will recover and the next bull market will be born.
With the rear-view mirror seemingly crystal clear, much has changed since the lows last March, and many of the imbalances are unwinding today. We have seen remarkable shifts in money flows in the first quarter from: sector rotations; growth to value stocks; stay-at-home stocks to the open-up the economy stocks; and a migration from bonds to stocks generally. Though each of these rotations is a larger discussion item, we highlight the notable recent performance in the financial and energy sectors. These stocks have been largely on the sidelines over the last decade and have suddenly become some of the best-performing names. The energy/oil sector is up in aggregate over 30% in just the first quarter as oil prices are rising. Likewise, the financial companies, benefiting from rising interest rates, are up 16% year-to-date. The rotation back into these sectors is another reminder of why we emphasize long-term and diversified equity models. In a truly diversified stock portfolio, rarely do all sectors perform in unison.
The first three rotations in bold print reflect equity selections and sector allocations. The fourth and more concerning to us is the rotation from bonds to equities. As has been an ongoing concern for us over the last several years, we believe the recent bond market decline could be a canary in the coal mine. Year to date, the bond market has fallen 4% as measured by the Total Market Bond ETF (BND) and the 10-year Treasury (down 6%). We believe the most concerning item for the economy is whether interest rates will rise too quickly, which is a symptom of excessive cash into the system; or the “too much money chasing too few goods” problem of excessive inflation. The Federal Reserve is intent on trying to thread this needle. They want inflation to increase, just not too quickly; a complex balancing act of pumping money into the system while hopefully being able to pull it back artfully over time through higher rates and reduced asset purchasing. This brewing problem continues to encourage our favoring large-cap value names, and a reduced exposure to the fixed-income markets.
We continue to remain encouraged for the year ahead. Despite the rising concerns, we still believe the re-opening of America will be an overwhelming force. Even though rates have risen, bonds continue to remain unattractive compared to equities. As we stated multiple times in 2020, we believe company earnings for 2021 will be remarkably strong, in part due to very favorable year-over-year comparisons, as well as the sizable stimulus sent to Americans. The pent-up demand for consumers worldwide to spend, travel, and resume life as normal is also a very notable tailwind to this bull market.
We thank you for your continued confidence in LYNCH & Associates. As always, we welcome you to schedule an appointment to review your financial situation.
Ryan T. Lynch, CFP® ChFC®
Form ADV Parts II & III of the LYNCH & Associates Uniform Application for Investment Advisor Registration and the LYNCH & Associates Code of Ethics is available to all clients at any time. If you would like to receive a copy, please contact Jennifer Farless at (812) 853-0878 or jfarless@LNAonline.com.
Office: 10644 Newburgh Road, Newburgh, IN 47630