The S&P 500 made an incredible comeback in 2020. After hitting the bottom on March 23rd, it rallied 67% by the close of last year.
No one could blame investors who felt skeptical of the market’s ability to keep that kind of wild momentum going into 2021. After all, it wasn’t just the substantial rally that seemed to indicate a market running hot. Valuations across the market ended 2020 at levels well above their long-term averages, despite the global economy still being handcuffed by the COVID-19 pandemic.
But the S&P 500 surprised us once again, finishing the first quarter of the new year up 6%. Now the question becomes: how does the market continue to book gains despite all the reasons indicating it could be time to take a breather?
It’s a simple math equation:
Economic Stimulus + Vaccinations + Improving Economic Outlook + Rising Corporate Profits = Market Gains
Each of these market catalysts significantly contributed to recent market gains. Below is a deeper dive into each of these catalysts… as well as a potential canary in the coal mine that investors should keep their eyes on as we move deeper into 2021.
Economic Stimulus – What’s a Trillion or Two Amongst Friends?
While the economy has made significant strides in its recovery from the depths of the pandemic, there are still large parts struggling to regain footing – particularly in industries such as hospitality, leisure, and entertainment.
In March, the latest and widely anticipated round of fiscal stimulus was passed into law to support the ongoing recovery of those Americans most affected by the pandemic. The American Rescue Plan (ARP) provided $1.9 trillion in fiscal aid to consumers, state and local governments, and schools. It also included funding for vaccinations and testing, as well as extended unemployment benefits.
This fiscal stimulus, combined with the continued accommodative monetary policy from the Fed, continues to put wind in the market’s sails. The ARP will likely be the final stimulus bill passed to help Americans bridge the financial gap created by the pandemic as the economy continues to re-open with vaccinations rising by the day.
Vaccinations – The Best Stimulus
The real shot in the economy’s arm, however, isn’t fiscal. It’s medical, with the accelerating rollout of COVID-19 vaccines helping to inoculate the public and allow businesses and communities to reopen.
As of April 12th, 74 million Americans were completely vaccinated and more than 120 million Americans had received at least 1 dose of of a vaccine.1 Because consumer spending represents about 70% of the U.S. economy, allowing people to get back to pre-pandemic purchases of goods and services will likely drive growth through the rest of this year.
Economic Outlook – Blossoming like Spring Flowers
While the stock market and the economy are not the same thing, the market does tend to respond well to data that indicates the overall good health of the economic system. Numbers from the first quarter of the year certainly painted a picture of a healing, improving economy, which may help the market continue its current upward momentum.
Consumer confidence hit a one-year high in March 2021, which was also the largest monthly increase in consumer morale since 2013. The optimism in consumer sentiment can likely be attributed to better-than-expected progress on America’s vaccination program and stimulus checks landing in the bank accounts of households across the nation.
Meanwhile, the U.S economy added nearly 1 million jobs in March alone, well above economists’ expectations, as business restrictions eased and coronavirus infection rates fell amid increased vaccinations. The ISM Manufacturing Index hit its highest level since 1983, further reflecting increased economic activity.2
All of this positive news has economists upping their forecasts. At the beginning of the year, economists expected the U.S. GDP to increase by 4% this year. Now, they expect to see the growth of the U.S. economy to push GDP up by 5.7% in 2021.3
Corporate Profit Expectations – Rising with Warmer Temperatures
The stock market has continued to benefit from rising expectations for future corporate profits. Estimates for expected earnings per share (EPS) for the first quarter were actually revised upward by 6%, a significant increase especially when considering the quarterly EPS estimate has declined 4.2% on average each quarter over the last 5 years.
The estimated EPS increase for the first quarter is the largest on record since the measure’s inception in 2002.4 It should come as no surprise that stocks continued to climb with the rise in expected corporate earnings.
Among All the Positive Indicators, Is There a Canary in the Coal Mine?
While the market backdrop gives support to further investor optimism, one concern that weighed on stocks in the first quarter was a rise in interest rates. The yield on 10-year Treasury bonds rose from 0.95% to 1.68% as investors weighed the impact of stimulus spending and an improved economic forecast that some believe can lead to higher inflation.
While inflation concerns amid higher interest rates make sense, we do need some perspective before we can make a determination on whether this is good or bad news.
In our view, the first quarter climb in interest rates should be viewed more as a sign of the beginning of the end of the pandemic rather than a sign of looming runaway inflation. The 10-year Treasury yield was 1.88% at the beginning of 2020, before the pandemic struck, so a rise to 1.68% as we enter recovery should not be that alarming.
While inflation and higher interest rates will continue to be a risk to stocks and current market valuations, our view would align with recent Fed comments that any spike in inflation should be viewed as temporary – and, perhaps more importantly, as a positive sign for the successful reopening of the economy.
Takeaways for Investors
The first quarter reminded investors that there are many reasons to be optimistic about the health and direction of the U.S. economy and the broader market overall. But investors shouldn’t forget the lessons of 2020 that market declines are frequently unpredictable and can feel very painful.
It’s being mindful of this balance between risk and reward that we believe that investors can best position themselves to achieve their financial goals by maintaining a balanced portfolio of stocks and bonds with a mix that reflects their time horizon and comfort with risk.
Source: 1 CDC.gov, 2 tradingeconomics.com, 3 ,4 Factset
Important Disclosures: Visionary Wealth Advisors (“VWA” or the “Firm”) is an SEC registered investment adviser. For information about VWA’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent version is available on the SEC’s IAPD website at www.adviserinfo.sec.gov.
This Market Review (“Review”) is provided for informational purposes only. The Review should not be construed as personalized investment, tax or legal advice, including the recommendation to engage in a particular investment strategy. This Review, by itself, does not contain enough information to support an investment decision. All information in this Review is considered accurate at the time of production, but no warranty of accuracy is given.
Furthermore, investors should not assume that future performance of any specific index, security, investment product or strategy referenced in the Review, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). Past performances referenced in the Review may not be indicative of future results and may have been impacted by events and economic conditions that will not occur or prevail in the future. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices referenced in the Review 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. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio because diversification does not protect against market risk. No investment strategy can guarantee a profit or protect against a loss in periods of declining values. Investing involves the risk of loss and investors should be prepared to bear potential losses, including the full amount invested.