The S&P 500 is up nearly 80% since March 23, 2020 (the COVID bear market bottom). The economic recovery is in full swing, and between stimulus checks, warm weather, and widespread vaccinations recovery momentum is likely to surge this summer; especially if the labor market recovery accelerates given reopening states and an uptick in services sector spending. In conjunction, we think markets should continue to push higher, although downside volatility is intensifying as headwinds from rising rates and the long-term implications of stimulus (e.g. higher taxes) become more prevalent. We continue to see opportunity in risk assets near-term, but suggest taking a more balanced equity approach going forward, especially given the recent rotation from growth to value.
Exhibit 1: S&P 500 Performance by Style (Core, Growth & Value)
Summer spending surge will boost the economy, but what comes next?
- The S&P 500 finished 1Q21 at a new all-time high (+6% YTD), but performance masks the volatility under the surface.
- Inflationary concerns are moving yields higher, weighing on growth stocks and causing investors to question the Fed’s course of action.
- GDP estimates in the US are being revised higher as pent-up consumer demand, warm weather, stimulus checks and vaccinations become a catalyst for a spending uptick.
- Unemployment continues to trend lower, and in states that have “reopened” unemployment is approaching pre-COVID levels.
- Massive fiscal stimulus helped stem off a global depression, but investors are now realizing there are consequences (e.g. higher taxes).
After one of the most volatile years in markets and the global economy the world is (finally) re-opening. The S&P 500 is up nearly 80% since its March 23, 2020 low and is off to another strong start in 2021 (up 6%). This summer the combination of warmer weather, stimulus checks and widespread vaccinations are likely to act as a catalyst for a surge in consumer spending, both for goods and services. And with this pick-up in activity we think labor market improvement will accelerate as services-sector businesses look to ramp-up hiring (See Exhibit 6).
However, despite the economic growth optimism there are structural changes occurring in markets that worry us. Specifically, the robust S&P 500 performance is masking investor preference changes, highlighted by the rotation out of high growth stocks and into more value-oriented defensive names (See Exhibit 1 and Exhibit 3). And on the fixed income side, a disconnect between investors and the Fed is occurring as bond yields shot up in late-1Q over investor inflation concerns, even as the Fed reiterated their stance of holding rates low.
In addition, we are concerned about the lingering implications of Biden’s stimulus (both CARES Act and Infrastructure) and an overheating economy. While we continue to believe the Fed will keep rates low into 2023, we think robust improvement in unemployment and higher inflation expectations may push the Fed to scale back their accommodative polices in late-2021. And if this occurs, we expect interest rates and yields will likely continue their trajectory higher. To hedge against these risks, we suggest de-emphasizing growth (e.g. technology stocks) in portfolios and adding core/value exposure. In addition, we continue to see opportunities in Real Assets for current income and inflation hedging given inflation and Biden’s Infrastructure Plan.
This commentary reflects the personal opinions, viewpoints and analyses of the author providing such comments, and should not be regarded as a description of advisory services provided by Defiant Capital Group or performance returns of any Defiant Capital Group client. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Defiant Capital Group manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary.
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A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.