Q1 2021 Market Update and Portfolio Update
Most of us are excited to turn the page on 2020 and move forward with a new year. With that in mind, this is a brief summary of our perspective on the current state of the markets and economy as well as an explanation of what our expectations are for the year ahead.
2020 Market Trends: Let's take a look back at what happened
Here are some helpful terms to remember as you read through this:
Economic Summary: What are the expectations for our economy?
This is a visual representation of the business cycle. As you can see we have moved out of the contraction or recession phase that we were in last summer. Our economy has moved into recovery and we are optimistic that we will continue to move forward with expansion.
An interesting item that we will be watching is the economic relationship between the U.S. and China. China handled the pandemic better than any other global economy. In fact, China surpassed the U.S. for the first time in international investment and they continue to build a stronghold in the global supply chain. This will definitely be a priority for the new Presidential administration to address and we will be watching to see how they handle this relationship.
As you can see on the charts below, spikes in new Covid cases have a direct effect on our economic activity. In recent weeks, we have seen new Covid numbers decrease which is great news and we all hope this trend continues. The chart on the far left, showing U.S. high-frequency economic indicators shows that while the manufacturing index showed continued strength through 2020, the services index struggled. This is indicative of travel, leisure, restaurants and other businesses that faced repeated closures and shutdowns. The middle chart shows small business activity which is the backbone of our economy. It is essential that we see improvement in businesses re-opening and employees back to work for continued recovery.
We receive a lot of questions right now about what to expect with the new Presidential administration and how politics will affect the stock market. It is an understatement to say that the political atmosphere is tense right now. However, we expect that the new political environment will be friendly to the markets. This expectation has been evident in the way that the markets responded to the election in November and in the months since.
As you can see below, the markets expect the Biden administration to bring a less-tense global trade environment. If friendlier trade policies boost corporate profits, they could offset any negative effects of tax increases to corporations. Also, with a fairly balanced congress, the expectation for major tax changes has decreased.
The last item related to politics is the expectation for more government stimulus. As I write this, it looks as though there will be a new stimulus package pushed through congress. This will likely improve some of the drag on small businesses and the services sector that I mentioned above.
Portfolio Objectives: What are we doing at Centered Financial about this data?
It is important to stick to the strategy:
We feel that in the short-term there are still some risks that have yet to fully-play out. With a continued moratorium on evictions and unclear data on mortgages in deferment or default, it is difficult to know the full repercussions of our high unemployment numbers. However, we are optimistic that the economy will continue to recover through this year and the likely hood of a double-dip recession is low.
Last year, we shifted some portfolio weight to defensive stock sectors that provide stability in times of recession. We have begun to shift back to cyclical sectors over these defensive sectors to position our portfolios for the recovering economy.
As you can see in the chart on the right above, The pandemic accelerated years of progress in the adoption of technology. These trends are not likely to reverse themselves. We feel it is important to have exposure to companies that are participating in disruptive trends. We also feel that companies that are exhibiting sustainable corporate policies and rewarding their shareholders through dividend growth will be important parts of our portfolio. The most undervalued companies for 2021 continue to be cyclical industries.
Summary and forward outlook:
If you have questions about your specific situation and how this information relates to you, please reach out to us for a conversation. We are happy to discuss your questions!
Disclosure: Past performance is no guarantee of future results. All performance numbers are included are based on an index. It is impossible to invest directly in an index and indexes are unmanaged. Information in this presentation was sourced from Fidelity Investments (AART) First Quarter 2021 Quarterly Market Outlook, Blackrock 2021 Global Outlook and LPL Financial Research Market Outlook 2021. This presentation is for educational purposes only and is not a solicitation of any securities or services. Centered Financial LLC. A Registered Investment Adviser. 701 Palomar Airport Road; Suite 300; Carlsbad, CA 92011; (760) 931-4729; www.centeredfinancial.com