2021 2nd Quarter Outlook
Our Vlog
For the past few years, we’ve been producing companion “vlog” videos to accompany most of these written commentaries. Our vlogs provide visual charts and summaries while our Chief Investment Officer offers additional thoughts. Some of you might find the vlog a preferred way of receiving this content – the accompanying vlog to this commentary can be found here.
Review of 1st Quarter
U.S. stocks mirrored the recovery in the economy, rising by 6% during the first quarter. There remains a high degree of volatility in the stock market which is likely to continue. Overseas markets also performed well – developed market stocks rose by 3%, while emerging market stocks went up by 2%. While equity markets rose in value, the increase in yields caused the bond market to decline by 3%.*
Economic Conditions
Broad economic statistics still don’t give much insight about the current state of the economy – conditions are changing too fast and the statistics are lagged too much. We do know classic statistics are showing improvement – GDP is on the rise and unemployment for March had fallen to 6.0%. We do want to comment on that unemployment level. After the recession of 2008-09, it took until late 2014 for unemployment to reach a level as low as 6%**. At that point the economy was considered to be in full recovery.
Over the past year we’ve been uniquely focused on recent and projected corporate earnings to help gauge the impact of the economy on the stock market. After a 50% decline in earnings during the first quarter of 2020, corporate earnings have been rising swiftly, and earnings projections for the 2nd quarter are at pre-pandemic levels. Then, over the next six quarters ending in 2022, earnings are forecasted to grow at a quarterly rate of 5% (or an annual rate of 20%).*** What this means is analysts are expecting the rapid growth in earnings we saw before the pandemic to continue after the recovery, which, if accurate, bodes well for the stock market over the next few years.
Volatility
With that optimism comes a lot of caution. There is a lot of volatility in stocks currently, and the reasons are clear. The swiftness and degree of the recovery is dependent on many uncertain factors – the speed and efficacy of vaccinations, the risk of variants of the virus, and how quickly various businesses adapt to a new environment. Some of this uncertainty will be resolved over the next few months, but some will take longer to be settled.
Bonds
The increase in yields for bonds caused the decline in bond prices, but will be good for investors in the long-run since they will earn higher returns going forward. As we discussed in our commentary last month, it’s very important to diversify into different sectors in the bond market. For example, while prices of Treasury and investment grade corporate bonds declined over the first three months, some sectors, such as high yield bonds, increased in value. Choosing exactly how to diversify your bond portfolio can be a tricky proposition. You should consult your advisor to determine how to best diversify your bond portfolio.
* Source of returns is Morningstar, Inc. Past performance is not indicative of future results.
** Source: Bureau of Economic Analysis
*** Source: S&P Dow Jones Indices
This update is provided by Savant Investment Group, LLC (“SIG” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in this report is derived from sources that SIG believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.
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