Perspective :

May 2021 Monthly Capital Markets Perspective

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The economic clown car

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


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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
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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.
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.
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