Market Comment: What's a Recovery to do?

Ann Miller |

A sharp recovery appears to be getting started with an estimated predicted US GDP growth at 7.5% in 2021, the fastest pace since 1983.  With the Washington stimulus and the reopening of the economy giving an unprecedented effect, the rebound seems to be coming at an uneven pace, with 8 million fewer jobs.  As the pandemic draws to an expected close, a more inclusive recovery could occur.

If anything, CEOs are worried that they may not be able to meet demand, with massive semiconductor shortages, as well as copper, lumber, and other raw materials.  But these growing pains make sense as the sectors begin to return to normal after a historic collapse.  Obviously, infrastructure investments make sense now, as does a lessened exposure to fixed income due to inflation concerns in case the Fed raises rates.  Long term bond yields have continued to rise, reflecting the quick recovery.

Due to this growth, there has been a strong acceleration in the general labor market with 916,000 jobs added in March and an upward revision of 90,000 in February.  The previously mentioned 8 million jobs necessary to get back to pre-pandemic level may be offset by the fact that every sector added jobs.  The Consumer Price Index has surged and that has been in large part due to the depressed prices and demand last year at this point. Even with this we are not expecting a return to high levels of 1970’s style inflation.  Our traditional holding of Energy and Financials have performed well over the past few months and US stocks have priced in much of the growth to date.  We expect a rotation away from broader pandemic friendly sectors such as Information Technology and into cyclicals.

We have experienced the sharpest economic “V” in history – a deep recession and a rapid recovery within five quarters.  If the global growth forecast of the International Monetary Fund of 6.0% for 2021 is realized, this will be the fastest global growth seen in almost 50 years.

We see a move into emerging market economies since we now see that these suffered less in 2020 and are expected to experience more rapid GDP growth in 2021.

Inflation is always near as bond yields push higher. As we see that the difference in yields between minimal Treasuries and our Treasury Inflated Securities, investors are surely wanting more compensation for the risk of higher inflation over the next five to ten years.  Until the Fed sees strong evidence that inflation is picking up, they plan to keep rates at near zero.

The effect seen on our clients, at or near retirement, is looking for yield, in equities or in the previously mentioned TIPS, corporate bonds and municipals, that are expected to outperform treasuries. High yield and emerging-market bonds should also remain strong.

The first quarter earnings season has passed the halfway point and from a growth standpoint has been 51.6% higher year over year above analyst’s expectations of 24%.  Last Thursday the SPX, the S&P 500, set a record high midweek and gave most of it back at weeks end.  We expect this volatility to continue.

As always, please call us at Affinity Capital to discuss any further questions concerning your portfolios.  We appreciate the opportunity to serve you.