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Investment Letter

1st Quarter 2021

One year ago, the stranglehold of the COVID pandemic was in full swing. The world witnessed drastic restrictions and changes to daily life, travel, and business operations.  Economic prosperity came to a screeching halt, and investors carefully assessed the damages of a significant financial market decline.  Fast forward to the present and we find a much different scenario.   Fiscal stimulus measures, an improving economic environment, and the rollout of the COVID vaccine have positively impacted conditions around the globe.  The recovery still has room for improvement, but normalcy is slowly being restored and optimism is on the rise.  

While we were confident the financial crisis would subside and improve in an expeditious manner, the recovery timeline has been much shorter than we anticipated.  The table below provides an illustration of the dramatic improvement.  The major stock market indices hit their respective COVID lows late in the first quarter of 2020 with varying degrees of severity.  Since that time, the recovery has been astounding.  Losses were quickly wiped out and fresh all-time highs have been achieved.
 

Stock Indices

03/31/2020 Close

03/31/2021 Close

One Year Change

One Year % Gain/Loss

 
 

DJIA

21,917.16

32,981.55

11,064.39

50.48%

 

S&P 500

2,584.59

3,972.89

1,388.30

53.71%

 

NASDAQ

7,700.10

13,246.87

5,546.77

72.04%

 

Russell 2000

1,153.10

2,220.52

1,067.42

92.57%

 

MSCI EAFE

1,559.59

2,208.32

648.73

41.60%

 
 

The 2020 positive momentum in equity total returns carried over into 2021.  The S&P 500 Index enjoyed a strong start with 14 new all-time closing highs and finished the first quarter up 6.17%.  Domestic small company stocks continued their recent winning streak as the Russell 2000 Index returned a healthy 12.71%, and international stocks (EAFE Index) posted a 3.48% return.

After leading the market rally in 2020 with a return of over 40%, the NASDAQ (tech heavy) Index experienced a wild swing in the first three months of 2021.  An increase of 9.37% and a run of 12 new all-time highs in January and February for the index was quickly followed by a 10% decline in 15 trading days.  

Thankfully, the index recovered these losses to post a positive total return of 2.95% for the quarter.  Volatility is a painful reminder to investors of how quickly fortunes can change in a short period.  

Economic conditions during the first quarter showed broad based signs of improvement. The pace of Gross Domestic Product increased; labor market support intensified; manufacturing activity signaled a return to expansionary conditions; business and consumer spending strengthened; demand for leisure activities and travel bolstered reports on tourism; housing activity remained high, but tight supply high demand, and rising costs were challenges; financial and nonfinancial services were improved; and agriculture conditions were stable.

The Federal Reserve confirmed stronger economic conditions in the recent Beige Book and the March 2021 Federal Open Market Committee (FOMC) meeting minutes. The Committee noted developments regarding the pandemic were encouraging and observed an intensified pace to the economic recovery. They also stated that inflation data continued to run below 2 percent and overall financial conditions remained accommodative, which reflected policy measures to support the economy and the flow of credit to U.S. households and businesses. Regarding monetary policy, the FOMC decided to keep the target range for the federal funds rate at the current level (0%-.25%). They expect it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with maximum employment and higher inflation. Purchases of Treasury securities and agency mortgage-backed securities will also continue as the Committee seeks to foster smooth market functions. The Fed reaffirmed its commitment to monitor a wide range of information and adjust monetary policy as needed.

Based on current conditions, we are upgrading our 2021 economic outlook to reflect a more optimistic stance. The vaccine has become more widely available, and evidence of a rising tide of confidence is spreading in domestic and international economies. Stronger global economic growth is expected, and subdued inflation conditions should persist. We believe inflation will gradually advance closer to the Federal Reserve’s sustained long-term goal of 2 percent, and we suspect Central Banks will continue to be extremely accommodative as the global economy improves. The FOMC’s unwavering commitment to this position means domestic changes to monetary policy will most likely be pushed out to 2022. Recent fiscal stimulus measures were prudent tools needed to support the COVID economy, but the debt incurred from these actions will have to be addressed at some point. We expect (and hope) government officials will have an enhanced cost-benefit discussion before agreeing to additional fiscal aid.  Improvement in  economic growth usually equates to healthier corporate fundamentals and investor profitability, but financial market volatility and higher asset prices concern us.  Eventually, the rising tide in asset prices will come back down.  Despite our concerns, we believe the 2021 positive trend in investor profits is a reasonable expectation due to pent-up demand, and we look for travel and leisure activities to be an economic boost during the summer months ahead. 

To sustain the current momentum in the 2021 economy, certain risks need to be avoided or reduced. Our list includes the following items of potential concerns: growing fiscal stimulus debt, new COVID virus variant, livelihood crisis, political disfunction and global unrest, significant tax changes (income, capital gains, estate), Central Bank policy changes, unexpected inflation, tension among our nation’s trading partners, extreme weather events, and cybersecurity failures. We are keeping a watchful eye on these and other threats as they develop.

A customized asset allocation strategy that fits an investor’s individual risk tolerance and investment goals and objectives is an advisable approach when constructing an investment portfolio. Experienced investors know that asset class returns vary from year to year, and this year’s winner can easily be next year’s loser. Over time and during periods of exceptional returns, an investor’s asset allocation mix can naturally transform into a disproportionate combination of investments. The prudent long-term investor regularly monitors portfolio changes and adjusts the asset allocation mix as needed. This process is known as rebalancing.  Rebalancing can involve selling investments in one asset class and reinvesting those proceeds to another asset class or investing new money in areas to keep the portfolio allocation mix in predetermined ranges. The balance that is created between diversified asset classes is an important investment principle because it helps to maintain the desired level of portfolio risk over an investor’s time horizon. 

As I have often stated, our investment philosophy remains based on the fundamentals. We believe it is time---not timing---that matters most.   History shows the successful long-term investor is patient, weathers market swings, and adheres to a disciplined investment process that includes a diversified asset allocation strategy based upon a tolerance for risk and need for return.

Over the course of a lifetime, financial goals and objectives change and evolve. A financial check-up can help evaluate your financial health and highlight adjustments. If you would like to discuss modifications to your financial situation, schedule a meeting, or have any questions, please contact our office.

In closing, I want to thank you for the opportunity of working with you and for your continued confidence and trust. I wish you and your family good health.

With kindest personal regards, I am

Very truly yours,

WILLIAM HOWARD & CO. FINANCIAL ADVISORS, INC.

  

2021 Total Return Index Performance
Asset Class
Index
1stQtr.
Cash
BofA/ML Three-Month U.S. Treasury
0.03%
U.S. Bonds
Barclays Intermediate-Term Treasury
-1.76%
U.S. Large Co. Stocks
S&P 500
6.17%
U.S. Small Co. Stocks
Russell 2000
12.70%
International Stocks
MSCI EAFE (net div.)
3.48%
Real Estate
DJ Select Real Estate Securities Total Return
10.00%
Source: Morningstar
 

    U.S. Economic Data

 

GDP

4.3% increase (annual rate) – 4thQuarter 2020

 
 

Inflation

1.6% CPI (less food and energy) and 2.6% CPI (all items) over last 12-months ending March. (Energy index up 13.2%)

 
 

Interest rates

Federal Funds Rate range = 0.00 – 0.25%. Fed will maintain until labor markets improve further.

 
 

Jobs

March 2021 data - Unemployment at 6.0%; non-farm payroll employment rose by 916,000 jobs; Labor force participation rate 61.5%; Improvement reflected the continued resumption of economic activity, and job growth was widespread.

 
 

Manufacturing

Manufacturing activity expanded for the 10thconsecutive month; March ISM Manufacturing Index registered at 64.7; Growth was widespread among all industries, but companies and suppliers struggled to meet increasing rates of demand due to availability of workers, parts, and materials.

 
 

Business Spending

Private non-residential investment improved to pre-COVID levels; New durable goods orders decreased slightly in February following nine consecutive monthly increases.  

 
 

Corporate Profits

4thQuarter 2020 - U.S. corporate profits decreased by 1.4%. S&P 500 Earnings per share = $38.18.

 
 

Housing

February 2021 year-over year data - New home sales up 8.2%; Existing home sales increased 9.1%; Median sales price of existing homes rose 15.8% ($313,000); Housing starts fell 9.3%; Building permits increased 17.0%; Housing inventory decreased 29.5% from last year; Unsold inventory = 2-month supply; MBA fixed 30-yr mortgage rates = 3.36% ending 04/02/2021

 
 

Consumer Spending

Disposable income weakened; Consumer Confidence Index surged to its highest reading in a year (an indication of stronger economic growth); Retail and food services sales spiked; Total vehicle sales climbed higher; Personal durable and nondurable spending remained elevated; Personal savings rate trended lower.

 
 

Energy

Oil price (West Texas Intermediate) = $59.19/bbl – 03/31/2021 (1stQT increase of 22%); Gas price (U.S. average regular unleaded) = $2.852/gal – 03/29/2021 (1stQT increase of 27%)

 

 

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