Hello friends, welcome to the April market outlook. We hope this note finds you well, and for those who celebrated, we hope you enjoyed Easter or Passover with your families. The first quarter of 2021 has ended, and what a quarter it was. Markets made a new high on Wednesday, March 31st. The historical trend of markets advancing going into a long weekend stayed true but, unfortunately, breadth deteriorated slightly. So, we’ll wait and see if there’s any fallout in the week to come.
Vaccinations are moving along smoothly here in the U.S. The latest data continues to show that we’re averaging 3 million vaccinations per day, a welcome sign as we continue to reopen. The economy is certainly on better footing compared to where we were at this time last year. But, by no means is it comparable to 2019. We still believe equity indexes are overvalued by 15-20%. However, given the amount of liquidity being provided by Central Banks and the US Treasury, interest rates at artificially low levels, stimulus, and now the idea of an infrastructure package (more to come later), we’re giving the indexes a wider range. Yes, we’re at all-time highs, but 2021 hasn’t been an easy ride for investors as volatility has picked up. We’re probably due for a small correction, or price consolidation. Consolidation is healthy, as you attract new buyers who are waiting on the sideline for a more opportunistic entry point. Summer may be quiet as many people take those long overdue vacations but our expectation is that we could be in for a rocky fall and end of the year. One key will be the Federal Reserve, and, more importantly, the bond market. The angst in the bond market, as we described in the past, caused the volatility we experienced at the beginning of the year. Our base expectation is that the Fed does nothing. Chairman Powell has articulated again and again that they will remain accommodative and “do whatever it takes” to restore “full employment.” Similar to the Yellen years, they will remain accommodating until they reach that 3% historic unemployment rate. Whether the unemployment rate is factual or not is up for debate. But that’s their goal and they have their blinders on.
The bond market may have other ideas though. We’re certainly on precarious ground. Any rise in yields will be a problem. The bond market will raise rates for the Fed if inflationary pressures continue. We expect them to continue as a result of inflation, and that should be front and center for investors at this moment, as there’s ample evidence anywhere you look in the real economy despite what the Fed proclaims. Anyone fill up their gas tanks recently? It’s there. Buying a home but continue getting pushed out by bidding wars and cash buyers? It’s there too. Suez Canal? Certainly an unexpected factor. From construction, to manufacturing, supply materials and elsewhere, there’s inflationary pressures all around. Let’s just hope they don’t accelerate from here.
This week we heard from the Biden administration regarding their potential infrastructure package. We won’t get into too much detail, as to where things currently sit, but this will be very difficult to pass in the Senate. Negotiating the package will take a long time to work through. At best, they’ll be lucky to pass anything by the end of the year. But again, with Republicans having no appetite to raise taxes and deficits at astronomical levels, this will be extremely difficult to pass. But, that doesn’t mean there won’t be speculation going on in stocks that address infrastructure. It began to occur last week when the deal was announced, which led the indices to new highs.
As we enter the new quarter, it will be interesting to see if the rotation from growth stocks to value stocks continues. Curiously, despite all of the proposed spending, the dollar has also strengthened lately. This rise appears not to be due to a material change here in the U.S., but rather due to vaccination and virus issues amongst the sovereign nations in the European Union. The dollar’s strength has created an attractive entry point for precious metals. Whether volatility continues in the metals space over the short term shouldn’t be of great concern in our opinion. If you believe the inflationary narrative and that the Dollar remains in a long-term downward trend, gold will perform well over the coming years.
As always, please reach out with any questions. Happy Spring everyone, here’s to better times ahead.