Frigid Temps Fail to Cool a Hot Stock Market - Adviser Investments

Frigid Temps Fail to Cool a Hot Stock Market

February 22, 2021

Please note: This update was prepared on Friday, February 19, 2021, before the market’s close.

The Dow Jones Industrial Average reached record heights this week before slipping Thursday, hitting pause on a blistering February rally. The promise of additional fiscal stimulus, sustained easy-money policies from the Federal Reserve and upbeat economic data, not to mention indications of accelerated vaccine rollouts nationwide, continue to support stock prices and provide ballast for the markets here and abroad.

On a total return basis this year, the Dow is up 3.2% through Thursday, while the broader S&P 500 index has gained 4.4%. The MSCI EAFE index, a measure of developed international stock markets, has returned 3.6%. The Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.30%, up from 1.12% at the end of 2020. The U.S. bond market has declined 1.5% this year.

Growth Is on the Way

As vaccines roll out at a faster pace, we are seeing signs that suggest economic growth will accelerate in the second half of the year. To name a few: Six Flags announced it will reopen all of its amusement parks in 2021 and hire thousands of people; industrial bellwether Deere & Co. smashed earnings expectations and provided upbeat guidance; and bank analysts boosted their price targets for big hotel chains Hyatt and Marriott, betting that renewed travel will elevate earnings.

Meanwhile, new reports this week showed increases in manufacturing activity, heightened confidence by homebuilders and a surge in consumer spending. Forecasters at the Atlanta Federal Reserve Bank boosted their estimate of first quarter economic growth from a 4.5% annualized rate to 9.5% this week while economists at Moody’s raised their estimate from 4.8% to 8.0%. Stimulus money is almost certainly driving the buying binge, but as yet, inflation remains more of a specter than a spectacle.

As we discussed in depth last week, we expect inflation will rise this year—from today’s low levels—but will remain manageable. The Fed has ample tools at its disposal to tame excessive inflation. More importantly, moderate inflation is generally a sign of strong economic growth.

Bruised Bonds

While stocks have notched multiple new highs, bonds are off to a difficult start this year with interest rates on the rise—the yield on the 10-year Treasury has risen from 0.93% at year-end to 1.29% on Thursday. That 36-basis-point increase may not sound like much, but remember that the 10-year’s yield was about 0.50% last August.

Bonds that are the most sensitive to interest rates—long-maturity Treasurys in particular—have borne the brunt of the market’s bruising. Meanwhile, the high-yield sector has escaped the price declines. As their prices have risen, some junk bond funds have seen their yields slip below 3.00%.

Why are some bond yields rising as others fall?

It’s all about the potential for the economy’s “return to normal” and the release of pent-up consumer demand. A growing economy is particularly good news for companies that issue junk bonds, as a rising economic tide lifts all boats. At the same time, a recovering economy brings with it concerns about inflation that tend to lift interest rates, causing investment-grade bond prices to fall.

As we said, we continue to believe that many of the headlines about inflation are overblown. But even if dramatically higher inflation doesn’t materialize, economic expansion will push yields upward. Consider that around the start of 2020, before the pandemic’s grip on the global economy took hold, the 10-year Treasury’s yield was around 1.9%. At the current 1.3% or so, we aren’t even close to that—yet.

Will Value Bounce Back in 2021?

Our client question this week is about value stocks versus growth stocks: “Can we expect value stocks to make a comeback over the next few quarters or will 2021 be all about growth stocks again?”

Vice President Charlie Toole responds:

After lagging for much of 2020, value stocks have started to stage a mini comeback. Since September, the Russell 1000 Value Index (a collection of stocks that are trading at a low price relative to their book value) has outperformed the Russell 1000 Growth Index (those that have a higher forecasted earnings growth rate) by nearly 8%.

Note: Chart shows relative change in value of hypothetical investments in the Russell 1000 Value TR and Russell 1000 Growth TR indexes on a weekly basis from from 12/31/19 through 2/16/2021. Each 0.1 change represents a 10% change in relative value. Sources: Morningstar, Adviser Investments.

Even with their recent rebound, value stocks trailed growth stocks by nearly 36% in 2020 and by more than 100% since 2016. Much of that underperformance stems from pandemic-related disruptions to businesses: JPMorgan and Bank of America saw delinquencies rise last year as borrowers struggled to stay up to date on loan payments. Johnson & Johnson’s medical devices were underutilized as elective surgeries were put on hold. Families postponed trips to Walt Disney theme parks and cruise lines were stuck in port.

Meanwhile, growth stocks saw their businesses thrive as lockdowns forced people to do more from home. Apple laptops and tablets were in high demand for working and learning in lockdown. Amazon boomed as people flocked to ecommerce and Netflix saw huge subscriber spikes as people looked for entertainment options.

In short, growth stocks benefited from work-from-home and social distance trends. Value stocks stand to benefit from a reopening of the economy. As more vaccines are distributed to more people, and life starts to return to a semblance of normal in 2021, that bodes well for value stocks. (Above, we mentioned positive news from Six Flags, Deere & Co. and the hotel chains.)

The bottom line is that there are opportunities for value and growth companies and their stocks to do well going forward. More important than how a particular stock is categorized is how the company is positioned for the future relative to its competitors and how prepared it is for the post-pandemic new normal.

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Financial Planning Focus:

Plan Your Post-Pandemic Expenses

After nearly a year of upheaval in our investments and our lives—markets crashing, then soaring; travel plans canceled, weddings postponed—we’ve all started to look toward brighter days. But remember, greater freedom to travel and entertain can come with a higher price tag.

Take the time now to consider future expenses to help you make the most of the new normal when it arrives. Here are three strategies to get you started:

  1. Maintain your moat. As many of us learned last year, cash reserves provide a welcome buffer in times of prolonged uncertainty. Before you leap back into old spending habits, make sure you have cash set aside in your emergency fund—enough to tide you over and pay your expenses for a time if you can’t work. The rule of thumb is to save up six months’ worth of expenses. If someone in your house has a chronic medical condition, or if you are a high-spending household, you might need to set aside significantly more.
  2. Update your battle plan. While large numbers of people were forced to tighten their belts during the pandemic due to unemployment, others were lucky enough to improve their bottom line. In fact, Americans’ personal savings rate quadrupled last year. If your situation has changed (for better or worse), take the time to revisit your budget to make sure it meets your needs going forward. If you don’t have a budget, create one. Use our budget worksheet to track your monthly expenses and income to get a picture of your savings, spending and overall cash flow going forward. You can budget for upcoming expenses or compare how changes in income will impact your lifestyle.
  3. Prioritize some pleasure. We know we’re looking forward to seeing friends and relatives—and palm trees—again this year. Now’s a good time to consider the travel expenses you’ll incur in the latter half of 2021. (Lock in your itinerary while there are still bargains to be found on flights and hotels.) If your lockdown routine helped you cut down on debt, make sure you can keep your finances on track while still accommodating your desire to live life to the fullest again.

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Strategy Activity Update

Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations.

Dividend Income

No trades this week. 

AIQ Tactical Global Growth

No trades this week. 

AIQ Tactical Defensive Growth

No trades this week.

AIQ Tactical High Income

No trades this week.

AIQ Tactical Multi-Asset Income

Sold iShares Core U.S. Aggregate Bond ETF (AGG). Bought iShares Short Treasury Bond ETF (SHV).

Adviser Investments’ Market Takeaways

You can find two new Market Takeaways videos on our website. Research Analyst Liz Laprade talked about the rise of SPACs, and Vice President Steve Johnson gave his perspective on the need for increased stimulus and infrastructure spending.

Looking Ahead

Next week, we’ll garner some insights on consumer attitudes toward the economy, with reports due on consumer confidence, sentiment, income, spending, savings and durable goods orders. We’ll also get a read on the housing market, with reports on home prices and new and pending home sales.

As always, you can visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.


Please note: This update was prepared on Friday, February 19, 2021, before the market’s close.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Purchases and sales of securities listed above represent all securities bought and sold in each strategy during the period stated. Each strategy’s portfolio generally includes more holdings in addition to the transactions listed above and in some cases the securities listed above may only represent a small portion of the particular strategy’s complete portfolio. Further, the securities listed above are not selected for listing based on their investment performance; thus it should not be assumed that any of the securities listed above were profitable or will be profitable, nor should it be assumed that future recommendations will be profitable. Clients and prospective clients should only make judgements about a strategy’s performance after reviewing the strategy’s composite performance information. There is no assurance that each security listed above will remain in the strategy’s portfolio by the time you have received or read this email. Securities are listed for informational purposes and are not intended as recommendations. Existing investor accounts may not participate in all transactions listed above due to each account’s particular circumstances.

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