2021 is off to an eventful start, so much so that I am tempted to start this commentary with something other than COVID-19. Alas, the Global Pandemic remains a dominant headline, so let us begin there. The United States remains optimistic in its battle against COVID-19. At the time of writing this commentary, just over 50% of Americans have received at least one dose of a vaccine, and all states have been instructed by President Biden to expand vaccine eligibility to all adults over the age of 16 as of April 19th. Economists predict a surge in economic activity this year, with Gross Domestic Product (the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period, used as a broad measure of economic health), GDP, expected to top 6%. The unemployment rate continues to fall and now stands at 6%; there are predictions it could fall to 4.5% by year end. Airlines are opening domestic capacity, preparing for a busy summer. Personally, my family is finalizing summer trip plans and, overall, our life is beginning to look more normal.
For the past decade, market returns have been dominated by Growth stocks. In late 2020, this trend began a reversal which has continued into 2021. Large Cap Growth stocks ended the quarter slightly positive at 1.74%, while Large Cap Value stocks returned 10.99%. Does this signal a more permanent trend? The answer remains uncertain, but if the economic recovery continues and interest rates continue to rise, we expect value sectors such as energy, financial, and basic materials to experience a boost. We saw that in the first quarter, energy gained 31% and the other two aforementioned sectors gained 13.01% and 11.27%, respectively.
With all the positive momentum in the market, it is natural to ask if we are nearing a market top or even a bubble. Many stock indices are up over 50% for the 1-Year period ending 3/31/2021. Keep in mind, 4/1/2020 was a very low starting point. Bitcoin is hovering at $60,000 (up approximately 100% in 2021). GameStop is up over 700% in 2021, and retail investors continue to use stimulus checks to buy stocks. I recently read a story about Your Hometown Deli, a single deli in New Jersey with $35,000 in sales in between 2019 and 2020 but is publicly traded (HWIN); it has a value of nearly $100M (1).
While stocks have continued to drift upwards, fixed income investments have not. During the first quarter, there was an exodus across almost all fixed income classes, with negative returns in virtually every category. We can expect an environment of rising interest rates as bond prices tend to move opposite interest rates. This does not mean fixed income should be avoided altogether. Investors will see increased yields (though still near historical lows) as rates increase and fixed income provides diversification during times of volatility.
Taxes are a major topic of discussion, as well; specifically, what will the administration’s tax plan ultimately look like? Typically, higher taxes act as an anchor on economic growth. While I think taxes are more likely to go up than down, there is much negotiation to come, and final legislation is far from complete. We believe the market is pricing in a tax increase. The question now comes down to how much of an increase we see.
As if the prior paragraphs aren’t unsettling enough, you can’t turn on the financial news without hearing the price of bitcoin or about the latest company to go public via a Special Purpose Acquisitions Company (SPAC). A SPAC is a shell company set up by investors with the sole purpose of raising money through an IPO to eventually acquire another company. At the time a SPAC is established, the acquisition target may be unknown. Online investing chat rooms have been pumping up individual stocks, sending them on wild rides; remember GameStop? Investors have even turned to trading cards (baseball, football, basketball), buying them in such large quantities that new cards are difficult to find. This demand has priced the ten-year-old buyer out of the market, as I know firsthand — my son and I were recently in a trading card store, and the owner told me he just finished his best month in 23 years.
When markets seem to lose their minds, it is more important than ever to focus on fundamentals and tune out the noise. At Persium, we take a long-term approach to investing; we don’t chase returns or fads. We continue to evaluate our investments and strategies with this view and have faith that a diversified portfolio and in-depth financial planning are keys to financial success.
The views and opinions expressed are of Persium Advisors, LLC. This commentary is provided for educational purposes only and should not be construed as investment advice. Persium Advisors is an investment advisor firm located in Atlanta, GA.
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