Market Update – 1st Quarter Review and Outlook for a Post-Pandemic Economy

May 20th, 2021 by Jonathan Chatfield, CFA

As the US ramped up its Covid-19 vaccination campaign, stocks rallied strongly in the first quarter. The S&P 500 posted a solid 5.77% gain. Bonds, meanwhile, were down as inflation fears began to have an impact.  With a post-covid economic recovery in sight, investor enthusiasm has lifted stock prices in anticipation of significant earnings improvement. Thus far, the stimulus packages and Fed interest rate policy have effectively underpinned economic growth and kept the economy out of recession. After posting back-to-back significant declines in the first and second quarter 2020 (-5% and -31.4%), GDP has posted gains in subsequent quarters (+33.4%, +4.3% and +6.4%).

As the economy gradually reopens, we expect to see continued economic growth throughout 2021. At the same time, we are concerned that inflation, which ticked up to 4.2% in the most recent release from the US Labor Department. We believe the Fed will gradually increase its interest rate target to keep inflation under control, starting in the 3rd or 4th quarter this year.

  • Following a downtrend in March, the unemployment rate unexpectedly ticked up to 6.1% in April of 2021. Prior to the economic shutdown in March 2020, the unemployment rate had hovered below 4% for 13 consecutive months. While the employment situation hasn’t fully recovered from the Coronavirus-induced shutdown, it has recovered more than half way from its peak of 14.8%.
  • Low interest rates and a lack of supply continue to underpin growth in real estate prices and allowing homeowners to refinance at lower rates, providing a boost to consumer spending.
  • Low interest rates continue to fuel investor interest in dividend-paying stocks to provide retirement income.

What does this mean for your investments?

As an economic recovery becomes more entrenched, we have shifted to a fully invested equity allocation, away from our more conservative position during the economic shutdown.

  • As the House and Senate debate additional stimulus and the infrastructure bill we are optimistic about the stock market. An improving economy, due to receding concerns as we move into a post-coronavirus world, we expect earnings gains in the year ahead. We expect to maintain a fully invested allocation to stocks in the months ahead.

 

About the author:

Jonathan Chatfield, CFA

Senior Portfolio Strategist

Mr. Chatfield has over 25 years of experience in the investment management industry.  He currently develops and implements the Anchor Bay Capital’s investment strategy across individually managed accounts.  He holds the Chartered Financial Analyst designation and is a member of the CFA Society of San Diego and the CFA Institute.