A common theme that resonated throughout most literature in predictions for 2021 was hope. With the tumultuous and unpredictable 2020 in the rearview mirror, analysts and investors alike focused on the promise of an effective COVID-19 vaccine to spur continued economic growth and instill confidence for a global reopening.
Change seemed to be on the horizon as the mindset for wealth management shifted towards human equity, global sustainability, and more Americans realized the importance of saving hard-earned dollars for future retirement.
The United States voiced the need for political leadership change during the November presidential election, with Democratic President-elect Joe Biden set to be sworn in on January 20th. In short, the new year holds the promise of a more stable environment for all in comparison to the roller coaster event of 2020. With the first quarter in the books, we review the trends and data that opened this year and how these figures could shape the rest of the second year of the new decade.
For those with a keen eye on the markets, Q1 2021 fell just about in line with expectations. Early on the S&P 500 Index continued a pattern of volatility as it closed at a new all-time high of 3,855 on the 25th of January, but the month closed at an overall -1.01% loss.
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The highly-concentrated index found traction and eventually returned 6.17% for the quarter. While this index is typically used as a benchmark for broad equity performance, over 22% of the index’s market capitalization was composed of just five components, or companies, at the beginning of the quarter.
The index is still an applicable benchmarking tool for equity portfolios, but it is worth noting that the results are being driven by an extremely unequally weighted composition of companies. Also worth noting is the exceptionally high 6.17% return relative to the 1.65% return that represents the average of the previous 30 first quarters. The index has closed positively in 40 of the past 50 years, averaging 10.9% growth, but the continued positive movement hinges on only a select few companies that bear the load of extreme market capitalization.
On the other side of the equation is the pressured bond market, typically measured by the Bloomberg Barclays US Aggregate Bond Index (the Agg). With the Federal Reserve all but guaranteeing a zero interest federal funds rate through the completed recovery from COVID-19 (some speculate through the end of 2022), pressure has been mounting on bond yields. 2020 resulted in a positive 7.6% return for the year for the Agg, but talks of rising inflation and continued fiscal spending led to a -3.37% return for the index in Q1 2021.
This result is nothing unexpected as the 10-year Treasury note closed 2020 yielding 0.91% – the lowest recorded close for any calendar year. The flight to bonds caused prices to rise and yields to decline at the beginning of the year, but after the passage of the $1.9T fiscal package yields began to show modest growth. The typically stable investment-grade bond market slumped early on, but there are strong expectations for increased bond returns throughout the rest of the year.
Beyond the continuous monetary and fiscal policy advancements, there are various outside factors to consider when assessing strategic investment opportunities to further wealth creation.
First is the unique unemployment data that has transpired since the onset of the COVID-19 pandemic. Within two months in 2020 alone the U.S. recorded the lowest (3.5%) and highest (14.7%) levels of unemployment in the past 50 years. The year opened with continuing unemployment claims at 5.072M, yet by the last week in March they had dipped to 3.794M. By the end of the quarter the 4-week jobless claims average stabilized at 719,000.
While this is the lowest level since the March 14, 2020 report, this is still roughly three times higher than pre-pandemic levels. Unemployment and national debt are two factors that could hinder an efficient economic restart. The increasing national debt, which began 2021 at $27.56T, is a unique factor that is projected to only increase for the sake of buoying the U.S. economy as it struggles to rebound to viable, sustainable levels.
Finally, inflation is at the forefront of the conversation that could further derail an efficient recovery. The consumer price index (CPI), a common inflation benchmark, rose only 1.4% in 2020, just slightly below the 1.8% per year average during January 2010 to December 2019 – the lowest decade of inflation recorded in the U.S since the 1930s.
While the economy is going through a “restart” from the pandemic-induced nose dive, your personal wealth management deserves a fine-tooth comb inspection. Starting with the basics of proper savings rates to the more intricate details of strategic investment allocation, being prepared for the upcoming unknowns has never been more important.
While researchers found that 36% of Americans decided to save the CARES Act stimulus funds and 35% used it to pay down debt, it is important to remain diligent to minimize debt and utilize suitable investments for organic savings growth. If the unknowns presented by the upcoming year are making your financial planning process a headache, the team at LGT Financial Advisors is here to guide you through the decision-making process.