Back to Market Commentaries

Capital Markets Perspective | May 2021

07 May 2021

The Economic Clown Car

Clifford Stanton, CFA | Director of Investments

It just keeps coming and coming and coming – positive economic data, that is. You could be forgiven for thinking that we’ve essentially had a 12-year expansion since the Global Financial Crisis (GFC) that was only briefly interrupted last spring…something about a virus if I recall.

According to the Bureau of Economic Analysis, real GDP (Gross Domestic Product) grew at a 6.4% annualized rate in the first quarter, and nominal GDP surpassed the pre-pandemic high. Disposable personal income increased at about a 24% seasonally adjusted annual rate (thanks to even more stimulus) and the personal savings rate hit 21%. In dollars, that comes to  total personal savings of $4.1 trillion, which is up from $2.3 trillion in the fourth quarter 2020.

Given the abundance of positive economic data, it was no surprise that The Conference Board[1] reported that consumer confidence hit its highest level since the pandemic began. Further, their survey data indicates that 9% of consumers plan to buy a house in the next six months, 14% plan to buy a car, and 20% plan to fly to vacation destinations this summer. Money is indeed burning a hole in the proverbial pocket of the consumer.

That’s not to dismiss the fact that we still have about 8 million fewer people employed than we did pre-pandemic[2]. Without question, there has been real economic damage to certain segments of our society. But the apparent solution to our seemingly fleeting economic woes was a conveyer belt of money from Uncle Sam to all of us. The era of big government is back, and the debt that began piling up in recent years will only accelerate, assuming the Biden administration can pass its expansive agenda. And other countries are taking note. According to the Wall Street Journal[3], “Bidenomics is taking root in Europe’s economically fragile south. Italy, Greece, and Spain…are once again running big budget deficits and planning to spend on a grand scale to revamp their economies.”

Remember those lessons in econ about government spending crowding out private investment? Theory and reality are about to have a bit of a showdown. But let’s not trouble ourselves about the future, because for the all-important month of April, the message was clear: Buy Everything! And investors did just that.

 

Key highlights

  1. Ebullient Equities

Every equity index that we track posted positive results in April, with growth stocks again taking the baton from their value counterparts that needed a breather after a torrid Q1. As far as the growth trend was concerned, size mattered not, with small, mid, and large cap growth stocks outpacing value stocks. And that was true overseas as well. However, market cap did make a difference as micro-cap stocks barely managed to eke out a gain while the mighty S&P 500® charged ahead by 5.3%.

Investors were focused on earnings season, and corporate America didn’t disappoint. Through month end, according to S&P, with 59% of S&P 500 companies reporting, 249 (84%) beat on earnings and 230 (77%) beat on sales. Further, operating margins increased from 10.4% in Q4 to 12.8%, which, if it holds, would be the highest number in at least 15 years. Even with commodities, wages, interest, and taxes rising or expected to rise in the not-too-distant future, Oxford Economics[4] reports that the analyst community forecasts further margin improvement over the next two years. Hmm.

As we sit at near all-time high valuations by most measures, individual investors’ equity holdings, according to JPMorgan and Federal Reserve data going back to 1952 (including retirement accounts), increased to 41% of their total financial assets in April – the highest level on record.[5] I’m sure that’s a good thing, right?

 

  1. Constructive Commodities

When the price chart for lumber starts looking similar to that of Bitcoin, you know that something has changed in the commodity world. And commodities were the best performing asset class during April, as the Bloomberg Barclays Commodity Index advanced by over 8%. Looking at the 25 sub-components of the Index, , 24 were positive for the month, with corn (+22%), soybeans (+22%), wheat (+18%), sugar (+15%), Tin (13%), coffee (+13%) and copper (+12%) all surging, and many others posting high single-digit returns.

 

  1. Rebounding Bonds

Even as the 5-year inflation breakeven rate hit its highest point in at least a decade, according to Federal Reserve data, the 10-year Treasury yield moved lower by 9 bps during the month, ending at 1.65% and leading to gains for all broad fixed income sectors. The Bloomberg Barclays Aggregate Index was up 0.8%, investment-grade corporates gained 1.1%, TIPs returned 1.4%, and long-term Treasuries advanced by 2.3%. High yield bonds also printed a solid return of 1.1% as option-adjusted spreads toyed with lows not seen since pre-GFC.

 

How are our strategies positioned?

 

Key highlights

Allocation Changes

In general, our strategies slightly increased their target allocations to U.S. large-cap equities and high-quality bonds by reducing allocations to TIPs and T-Bills. Relative to our long-term allocations, we remain underweight to U.S. large-caps, REITs, high-yield bonds, and absolute return; and are overweight U.S. and international small caps, long-term Treasuries, and managed futures. Overall, we are slightly conservative with respect to our equity exposure relative to where we would expect to be invested over the long run.

 

Performance Attribution

For the month, all our strategies generated positive returns, with our more aggressive strategies now sporting year-to-date returns that we would normally be happy with over the course of a year. However, as mentioned, our equity positioning was below long-term targets and thus held back relative performance, as did our small cap tilts in the U.S. and abroad, and our emerging market exposure. On the fixed income side, our exposures were mostly beneficial, as our longer duration positions and actively-managed funds that we employ outperformed the broad bond market.

 

Long-Term Return Expectations

We are beginning to sound like a broken record here. Still, as risky assets continue to climb at a pace that exceeds the growth in longer term economic and corporate fundamentals, and as a result, push valuations higher, our return expectations for all equity classes declined during the month. The stronger the near-term gains, the more they take away from future returns. As for fixed income, expectations fell across the board as well. It is exceedingly difficult to build a well-diversified portfolio at this point that can produce the kind of real returns that investors have come to count on historically. Having said that, we continue to shape our risk exposures to seek to harvest as much of the gains as we can without putting our downside targets in jeopardy.

[1] The Conference Board Consumer Confidence Survey, April 2021.

[2] Bureau of Labor Statistics, April 2021.

[3] The Wall Street Journal, “Bidenomics Takes Root in Europe’s Economically Fragile South”, May 3, 2021.

[4] Oxford Economics Latest Global Outlook, April/May 2021

[5] The Wall Street Journal, “Americans Can’t Get Enough of the Stock Market”, May 2, 2021

 


Past performance is no guarantee of future returns. Performance discussed represents total returns that include income, realized and unrealized gains and losses, but gross of advisory fees. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an s investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees and expenses. Frontier may modify its process, opinions and assumptions at any time without notice as data is analyzed.
Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice. Frontier obtained some of the information provided herein from third party sources believed to be reliable, but it is not guaranteed, and Frontier does not warrant or guarantee the accuracy or completeness of such information. The use of such sources does not constitute an endorsement. Frontier’s use of external articles should in no way be considered a validation. The views and opinions of these authors are theirs alone. Reader accesses the links or websites at their own risk. Frontier is not responsible for any adverse outcomes from references provided and cannot guarantee their safety. Frontier does not have a position on the contents of these articles. Frontier does not have an affiliation with any author, company or security noted within. Frontier reserves the right to remove these links at any time without notice.
Exclusive reliance on the information herein is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell any securities, commodities, treasuries or financial instruments of any kind. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment or tax advice. Frontier does not directly use economic data as a part of its investment process.
Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. The estimates, including expected returns and downside risk, throughout are calculated monthly by Frontier and will change from month to month depending upon factors, including market movements, over which Frontier has no control. They are only one factor among many considered in Frontier’s investment process and are provided solely to offer insight into Frontier’s current views on long-term future asset class returns. They are not intended as guarantees of future returns and should not be relied upon in making investment decisions.
Hypothetical expected returns have certain limitations, are discussed for illustrative purposes only and it should not be assumed that actual results will match the hypothetical expected returns referred to. Unlike actual performance, hypothetical expected returns do not represent actual trading and since trades have not been executed, the results shown may have under or overcompensated for the impact, if any, of certain unforeseen market factors. Hypothetical expected returns, whether backtested or forecasted, have many inherent limitations and no representation is being made that any account will or is likely to achieve the results expected. In fact, there are frequently material differences between hypothetical expected results and actual results achieved. One of the limitations of hypothetical expected results in that they do not take into account that material market factors may have impacted the adviser’s decision-making process if the firm were actually trading clients’ accounts. Also, when calculating the hypothetical expected returns, the adviser has the ability to change certain assumptions and criteria in order to reflect better returns. There are numerous other factors related to the markets in general or to the implementation of any specific investment strategy that cannot be fully accounted for in the preparation of hypothetical expected results, all of which can adversely affect actual trading and performance. Importantly, it should not be assumed that investors who actually invest in this strategy will have positive returns or returns that equal either the hypothetical expected results expected. In addition, performance can, and does, vary between individuals.
In reviewing the performance information presented here, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance.
Nominal GDP measures a country’s gross domestic product using current prices, without adjusting for inflation. Contrast this with real GDP, which measures a country’s economic output adjusted for the impact of inflation.
Real Return – The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external factors
Frontier provides model strategies to various investment advisory firms and does not manage those models on a discretionary basis. The performance and holdings of model strategies may vary from strategies managed by Frontier.
© Morningstar 2021. All rights reserved. Use of this content requires expert knowledge. It is to be used by specialist institutions only. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.
It is generally not possible to invest directly in an index. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index.
INDEX
INDEX DESCRIPTION
S&P 500
Represents US large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ
Bloomberg Commodity Index
This is a broadly diversified index that allows investors to track commodity futures through a single, simple measure. The DJ-UBSCISM is composed of futures contracts on physical commodities.
Barclays US Aggregate Bond
Measures the performance of the U.S. investment grade bonds market. The securities must have at least one year remaining to maturity, must be denominated in U.S. dollars and must be fixed rate, nonconvertible and taxable.
Barclays Capital Long U.S. Treasury
Includes all publicly issued, U.S. Treasury securities that have a remaining maturity of 10 or more years, are rated investment grade, and have $250 million or more of outstanding face value
Barclays US Treasury US TIPS
Represents inflation-protected securities issued by the U.S. Treasury. TIPS are indexed to the non-seasonally adjusted Consumer Price Index for All Urban Consumers
Bloomberg Barclays US Corporate Bond
Measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
Credit Suisse Frist Boston High Yield
Represents domestic non-investment grade corporate bonds. Floating-rate and convertible bonds and preferred stock are not included.
Frontier’s ADV Brochure and Form CRS are available at no charge by request at info@frontierasset.com or 307.673.5675 and is available on our website www.frontierasset.com.
050721CST053022

Market Commentaries

Today's Markets