Looking Back:
- One year ago, the WHO declared COVID-19 a pandemic and the equity market troughed. The S&P 500 has subsequently soared by 75% during the past 12 months.
- 10Yr Treasury yields continue to march higher, driving daily movements in the market, and closed around the 1.72% level. As far as “reasons” the 10-year yield is increasing – the introductions of President Biden’s Build Back Better infrastructure program of nearly $4 trillion in spending over the coming years. That, combined with the continued acceleration of vaccine distribution, is pushing growth and inflation expectations ever higher.
- 5YR Breakevens (market estimated inflation over the next five years) is 2.40%, above the Fed’s desired 2% threshold – remember, Powell said he’s let this run hot for a bit, i.e., above 2%. Ultimately, the yield curve is pricing in higher inflation expectations. We believe that the market is pricing in a normalization of rates, as the U.S. is the only country still below its Pre-COVID 10Yr interest rate level.
- The Fed promised that rates would remain in the 0% – 0.25% range through 2023, with the goal of stoking inflation to moderately exceed 2% for some time. Though, the market yields are now pricing in an increase towards the end of 2022.
- President Biden announced the first part of his infrastructure plan, which focuses on building out the nation’s physical infrastructure. Between both the physical and social infrastructure plans, Biden is aiming to spend $4 trillion over 8-10 years while raising $3 trillion in taxes. Biden’s plan will propose raising the corporate tax rate from 21 to 28 percent, raising the minimum tax on US multinational income overseas from 10 to 21 percent, and imposing a 15 percent minimum book tax on companies that make capital investments (often termed the “Amazon tax”).
- Economic data is improving but the gains have softened from the initial V-shaped bounce. Optimism thrives on vaccine developments – Manufacturing and Services PMIs continues to be very strong.
- Bonds hitting a rough patch and stocks broadening. Latest scorecard:
- U.S. payroll employment rose strongly in March, increasing 916,000 m/m with upward revisions of +156,000 to prior months. The unemployment rate declined to 6.0% and the labor force participation rate rose +0.1% point to 61.5%. Bottom line, there’s still some U.S. labor market slack, but the economy is picking up quickly now. The Fed has indicated they want to continue with easy monetary policy, but we believe this position will likely be tougher & tougher to maintain as the year goes on.
- Since the start of last year, investors have poured more than $130 billion into SPACs, “blank-check companies” traded on an exchange with the goal of merging with a private company to bring it public. The market has seen more companies publicly list their company at valuations over $1B and with zero revenues than what we saw in 2000. In January, 88% of SPACs traded above their $10 NAV, now many trade well below. SPACs pulled back 11% in March, which now totals a decline of almost 25% from the February highs.
- Earnings season for Q4 was excellent. Per Factset, 81% of companies have beat expectations. The blended growth rate is +1.7% vs. an expected decline of 9%. The market has not rewarded earnings surprises nor punished misses. Full year 2020 EPS decline is slated at -11% and a revenue decline of -1%. 2021 EPS forecast at +23% and revenue growth of +9%.
- Last year S&P 500 operating earnings = $165. Bottoms-up for 2020 = $135 (was as low as $125 in June). 2021 = $173.
- S&P 500 fwd. P/E is at 22x. CAPE Ratio is 35x. EAFE is 18x forward P/E, while EM is at 16x. R1V us 18x v. R1G at 31x.
Looking Ahead:
- Thanks to vaccine developments, there is now light at the end of the tunnel, and markets are pricing in a strong recovery in 2021 propelled by low interest rates. Still, the best fiscal stimulus the economy can have is reopening the economy.
- This is not a normal economic cycle, which are cause by financial excesses. This may help explain the stealth recovery in asset prices (along with the Fed flooding the markets with liquidity).
- We would expect bond yields to reflate as the pandemic improves and economic activity begins to normalize. That was certainly the case over the last two months, as the 10Yr now trades closer to its pre-pandemic level.
- Should a successful vaccine allow for the resumption of normal economic activity, our expectation is that rates will rise, and market leadership will shift away from Tech Growth into more downtrodden components of the market and the last week of February showed this.
- Longer-term, valuations and bond yields will eventually matter, and both will lower expected returns for balanced portfolios.
Disclosures
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed.
This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
The Nasdaq Composite Index measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market. To be eligible for inclusion in the Index, the security’s U.S. listing must be exclusively on The Nasdaq Stock Market (unless the security was dually listed on another U.S. market prior to January 1, 2004 and has continuously maintained such listing). The security types eligible for the Index include common stocks, ordinary shares, ADRs, shares of beneficial interest or limited partnership interests and tracking stocks. Security types not included in the Index are closed-end funds, convertible debentures, exchange traded funds, preferred stocks, rights, warrants, units and other derivative securities.
The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.
The Russell 2000® Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000® Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000® is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.
The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries*around the world, excluding the US and Canada. With 902 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The MSCI Emerging Markets Index captures large and mid-cap representation across 26 Emerging Markets (EM) countries*. With 1,387 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed securities.
Advisory services offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2104-1.
