With the country beginning to see light at the end of the COVID tunnel, financial markets have experienced interesting dynamics in recent months. Markets have digested the implications of a nearly $2 trillion COVID relief package and a vaccine rollout that has largely exceeded expectations, providing a strong boost for the services and cyclical sectors of the economy that were most impacted. We’re also on the verge of new Infrastructure bill that, if passed, could drive further job gains, and provide needed long-term investments in roads, bridges, and clean energy. Collectively, these government actions have resulted in markets revising higher their expectations for economic growth.
With this improved growth outlook has come an increase in interest rates and a steepening of the yield curve, factors which have altered the leadership in the market. Sectors most directly exposed to this change of outlook, such as banks, energy, and industrials, have rebounded strongly from their lows of last year, while the ‘stay at home’ stocks largely in the technology sector have slowed after their stellar run in 2020. Nevertheless, market indices remain at all time-highs, and as the market gradually adjusts to this ‘new normal’ we expect the pendulum to shift back towards the middle, balancing both the immediate impacts of the recovery with strategic factors that will dominate over the long run. Shifts we made in our strategy last year have given your portfolio the ability to benefit from both of these trends.
As we charge ahead into the summer, markets will be very focused on key economic data, such as changes in the unemployment rate, consumer prices, and wages. These data points will be important to understanding just how ‘turbocharged’ the economy really is and to what extent the Fed may eventually need to soften their accommodative stance. Markets will also have to contend with the possibility of a rise in corporate taxes, which would blunt some of the earnings momentum they are likely to see as a result of the recovery. These factors collectively constitute a ‘tug-of-war’ on the market, and the precise timing and nature of new economic data and government policy will be critical in determining where markets go next.
We will be watching these dynamics closely in the coming months and stand ready to act as market fluctuations provide us with opportunities to create value in your portfolio. Despite the ‘twists-and-turns’ of late we remain cautiously optimistic on markets looking into the second half of the year, recognizing that the fundamentals of strong growth, job gains, and improved earnings are strong forces to reckon with. We believe policy makers are well up to the task of facilitating a historic economic rebound while containing some of the risks inherent in a booming economy.
As always, thank you for your continued trust and confidence in our firm. We wish you and your family the best and welcome any comments or questions you have.