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.





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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.

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