Dear Valued Clients,
It is fair to say that everyone has been experiencing some COVID fatigue as of late. Thankfully, warmer weather is on the horizon, state-imposed travel restrictions are loosening, and we are seeing signs of normalcy again. With this optimism comes the logical question – what will our lives look like in the post-pandemic world? Will the US economy return to the low growth, low inflation era we witnessed in the last decade, or will all of this unprecedented stimulus lead to a different outcome?
As the vaccine rollout continues in the US, there has been a marked improvement from the COVID-19 peak seen in January. We are averaging well over 2 million doses daily, and as of the beginning of April, 100 million people have had at least one vaccine dose per the CDC. This equates to nearly a third of the US population and based on the current run rate of vaccinations we could likely see 140 million more doses administered before June. In further good news, a recent study1 has shown the Pfizer and Moderna vaccines to be 80 percent effective after only the first dose!
This optimism on the COVID-19 front combined with improving jobs numbers, an accommodative Federal Reserve policy, an additional $1.9 trillion stimulus package, and the possibility of an infrastructure bill have led the S&P 500 to all-time highs. US Economic growth expectations have also been trending upwards, with the most recent survey showing 5.8 percent GDP growth for 2021 as compared to the 4.9 percent median estimate in February. There is a significant disparity between estimates, however, with firms such as Goldman Sachs, Barclays, Bank of America, and BNP Paribas predicting growth in 2021 to be as high as 7 percent. A lot of this rapid growth is expected to come from pent-up demand as consumers spend down their savings, which have been nearly double the recent long-term average of 7 percent of disposable income.
With growth accelerating, fears of inflation have driven longer-term US interest rates higher, steepening the interest rate curve as near-term rates remained pegged at low levels due to Fed policy. This steepening, some argue, is less constructive for certain segments of the equity market, in particular growth stocks which have long-duration earning streams. The market has largely shrugged off this move for now, but it remains a concern. US equity valuations continue to look stretched on an earnings basis, and the substantial increase in debt undertaken by a number of companies in COVID-effected industries, as well as the rise in US government debt issuance, means that the negative impact from an increase in interest rates could be significant. For this reason, we continue to focus the majority of the equity exposure in the US towards more quality-oriented businesses that we believe trade at more reasonable long-term valuations. These areas should participate well should the economy continue to flourish, but also provide greater protection should we see a setback. To summarize, we are optimistic about the US economic recovery in the near term, but uncertain as to whether the overwhelming fiscal and monetary stimulus we required to get us through COVID will be without longer-term implications.
The near-term outlook on global equities, particularly Europe and South Asia, has been muted as the vaccine rollout remains challenged and fiscal support has lagged what we have seen in the United States. France, for instance, has only managed to administer 12 million doses in total, which equates to around 17 percent of its population. It is likely, that the full reopening of many of these economies will be delayed and as a result, could impede their growth outlook for 2021. However, similar to the US, these markets witnessed a rotation of investor interest into more commodity-driven and cyclical industries. This impeded the performance of our active fund managers in International and Emerging Markets equities in the first quarter, as they remain focused on companies that provide long-term quality growth. The recent rise in interest rate expectations in the US also led to a strengthening US dollar, a negative for non-US equities. Despite this, we remain constructive on International and Emerging Market equities given our structural growth expectations, and valuation levels being at a wider relative discount than normal to the US.
In regards to other allocations, we continue to keep our fixed income portfolio at a low-risk level (both duration and credit risk) given the interest rate movements we have seen and the potential for inflationary pressures to drive yields higher. The current depressed yields in fixed income along with the uncertainty in equity market returns as expressed above drives us to maintain a higher cash balance than normal, and we retain our allocation to gold as a risk diversifier.
As always, we are grateful to be able to serve such wonderful clients and hope to see more of you in person in the near future. Until then stay safe and enjoy the longer days of spring sunshine ahead!
Scott Upham, CIMA® CPWA®
Contributions were made to this letter Contributions were made to this letter by Amyn Moolji, CIO & COO, & Jeffrey Burch, Director of Wealth Management, & Taylor Haselgard, Portfolio Manager.
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