One Year and Counting

May 2021 | Victoria Bogner, CFP®, CFA, AIF®

Back to Market Commentaries

We’re through the first quarter of 2021 and one year beyond the bottom of the pandemic-induced bear market of 2020. It’s hard to believe that March 23, 2020 is an entire year behind us. And back then, it would have been hard to imagine COVID still very much with us over a year later.

Although you might not realize it by looking on the surface, the first quarter of 2021 was challenging in many respects. Investor sentiment swung widely back and forth between hope for those stocks that had gotten trounced last year and enduring faith in the pandemic stocks that had done so well in 2020. Adding to these crazy double-digit stock swings were worries about inflation, interest rates, small pockets of bubbles (thanks to Reddit threads and cryptocurrencies), vaccine effectiveness, new COVID strains…the list goes on and on. This led to some pretty substantial volatility in many market sectors.

Whenever “crazy” happens, it’s important to go back to the underlying fundamentals. Let’s think this through. Over half of the US population now has their first COVID vaccine. Looking at high frequency data, we’re seeing the reopening take hold. 

More people are going through TSA checkpoints, using their GPS navigation systems, staying at hotels, and making restaurant reservations. Consumers are spending their COVID stimulus checks, leading to a boost in GDP. Fed Chairman Powell has stated that the Federal Reserve is committed to keeping rates low through 2022 at least. That all translates into high GDP numbers for 2021, perhaps one of the highest numbers on record.

What about interest rates? Those were going up earlier this year. As those go up, don’t equities go down? 

It turns out that since 2009, stocks and interest rates have moved together as long as rates are below 3.6%. Then they start to move in the opposite direction. 10-year Treasury yields currently stand at about 1.65%. We have plenty of wiggle room on interest rates, and even crossing the 2% threshold isn’t going to stop the stock market for long.

When we factor in President Biden’s infrastructure plan and recalculate using the capitalized profits model, the fair value of the S&P 500 goes from our original target of 4,200 to 4.500. That’s another 7.5% upside from where we are now. What that means is in our opinion, the broad US stock market isn’t overvalued at these current liquidity and interest rate levels.

With that said, we have been moving more toward exposure to sectors that will benefit from infrastructure spending and reopening while still maintaining positions in sectors that have showed strength throughout 2020, specifically those that have competitive advantages in the marketplace, investor accumulation, strong and accelerating earnings, and long-term tailwinds.

Since bonds have struggled so far this year, we’re focusing more on buffered ETFs to 

provide upside potential with downside buffer protection. We’re also invested in bond funds whose managers find unique opportunities in the bond space that provide good income while maintaining conservative risk.

Speaking of risks moving forward, the biggest one we see at the moment is inflation. If it’s a bigger problem than the Fed anticipated, they may throw their current plan out the window and raise rates earlier than expected. That would slow down the economy and bring valuations back down. It doesn’t seem likely, but it’s the least impossible scenario.

But for now, we remain positive on the market and fully invested in all of our managed models. Interest rates are low, liquidity is high, the Fed is accommodative, a gigantic infrastructure plan is in the works, corporate profits are rising, and consumers are spending money. All of that points toward a rising market, although not without some bouts of volatility. That’s why it’s important to keep the big picture in mind. Don’t sweat the small stuff. Leave that to us.

 


Disclaimers and Notes

Registered Representatives offering securities and advisory services through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker/dealer and Registered Investment Advisor. Advisory services also offered through Affinity Financial Advisors, a Registered Investment Advisor, operating as McDaniel Knutson Financial Partners. Cetera is under separate ownership from any other named entity.

Check the background of your financial professional on FINRA’s BrokerCheck.

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into accounts the effects of inflation and the fees and expenses associated with investing. The Volatility Index, or “VIX”, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors’ sentiments.

The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

Individuals affiliated with this broker/dealer firm are either Registered Representatives who offer only brokerage services and receive transaction-based compensation (commissions), Investment Adviser Representatives who offer only investment advisory services and receive fees based on assets, or both Registered Representatives and Investment Adviser Representatives, who can offer both types of services.

This is published for residents of the United States only. Registered Representatives of Cetera Advisor Networks LLC may only conduct business with residents of the states and/or jurisdictions in which they are properly registered. Not all of the products and services referenced on this site may be available in every state and through every representative listed. For additional information please contact the representative(s) listed on the site, visit the Cetera Advisor Networks LLC site at ceteraadvisornetworks.com.
We are Insurance licensed in AR, AZ, CA, CO, FL, IA, IL, KS, KY, LA, MD, MI, MN, MO, ND, NE, NY, OH, OK, OR, PA, SC, SD, TX, VA, WI, WY. CA Insurance License# 0G81128.

NOTICE: The information contained in this electronic message is confidential and intended only for certain recipients. If you are not an intended recipient, you are hereby notified that any disclosure, reproduction, distribution or other use of this communication and any attachments is strictly prohibited. If you have received this communication in error, please notify the sender by reply transmission and delete the message without copying or disclosing it.

© 2020-2022 Affinity Financial Advisors, operating as McDaniel Knutson Financial Partners.

Client Relationship Summary BrokerCheck Logo