Review
The first four months of 2021 continued the sustained gains we have seen in the markets since the March 2020 lows of the Covid-19 selloff. Optimism surrounding vaccine distribution and gradual lifting of Covid related restrictions routinely sent markets to new highs. There was a noted change in sector performance as value stocks outperformed growth stocks. This marks a dramatic shift as growth had significantly outperformed value since January of 2019.
Outlook
Inflationary warning signs have thrown some caution into the exuberance of a re-opening economy and roaring 20’s like sentiment. As I wrote in my January letter to clients, I warned I was cautious about market prospects:
“The next few months will be very telling which way the economy and markets may head over the next four years. If all policy is passed as suggested, the prospects for the markets and economy could be problematic. Higher tax rates and massive government spending could cause rapid inflation and force the Federal Reserve to raise interest rates earlier than expected and drop the US into a recession.”
Since that letter, the Biden Administration passed a $1.9 trillion relief bill, and hopes for $2 trillion infrastructure and $1.8 trillion American Families Plan packages, as well as a tax-increase plan. The prospects for excessive government spending with the addition of tax hikes has caused Treasury Bond interest rates as well as the Consumer Price Index (cost of goods) to spike faster than expected. The overlying question is: are the inflationary signs a short-term result of a re-opening economy, or is it a trend that will force the Federal Reserve to take steps to keep inflation in check? Historically, inflation is the main culprit in ending bull markets. If the Fed needs to react too soon in order to address an over-inflationary environment, it could send an already fragile economy into recession.
Equities
Due to the scenarios mentioned earlier, we believe markets will be volatile for the next few months with a significant chance for a short-term correction. However, our opinion is still that equities will continue to outperform over the long run and would not base decisions on short-term volatility. If there are signs the Federal Reserve will need to move on rates sooner than expected, we would be prepared to adjust portfolios accordingly to a more defensive stance. Prospects for higher interest and tax rates will continue to put pressure on growth (mainly technology) and favor value (Financials and Energy).
Fixed Income
We are still underweight fixed income. With interest rates rising, fixed income will struggle. VCM portfolios are positioned for an inflationary environment. They are currently exposed to shorter duration fixed income as well as TIPS and senior bank loans which hold up better in such situations.
Alternatives
Commodities are historically a very good hedge against inflation and tend to rise in that environment. Therefore, we have taken a broad based commodity position in client portfolios to take advantage.
As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering any market uncertainties.
Jason M. Vavra, CPA, PFS
Email: jvavra@vcm-wealth.com Website: www.vcm-wealth.com Twitter: @VavCap
Disclaimer
The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.
