At the end of the first quarter, the S&P 500 had managed to record a stunning 56.3% total return, including dividends, over the past 12 months — a historic rally indeed. The purchase of equities remains firmly intact as vaccines appear to have the spread of COVID-19 in check, and fiscal and monetary policies have ignited a significant economic recovery since the second half of 2020. In this article, I will recap some of the headlines of the past year as well as highlight issues we should pay attention to going forward.
The real estate industry is booming with a strong demand for houses, and the high costs of building supplies has not had a noticeable impact. Lumber prices in general have increased over 200%, and there is a 3 – 4 month wait on certain other supplies, yet building is strong.
Smaller companies tend to react the most quickly in an economic recovery, and that has proven to be true as consumer spending increases and improvements take place in the labor market. Energy has performed strongly, and that is evident at the gas pump. It should be noted that the uncertainty of regulatory risks from the Biden administration and the global push to renewable resources of energy continue to reshape the industry and cast a shadow over the future.
While equities have had record-breaking growth, the outlook for the bond market is a different story. The monetary and fiscal policy, and the Federal Reserve’s decision to allow inflation to grow without increasing interest rates, are sounding alarms in the bond market.
Recent news shows that unemployment has dropped dramatically, and employers are actually having difficulty hiring because many of the potential workers are choosing to receive an unemployment check through September instead.
There seems to be no fiscal restraint in Washington. While this definitely stimulates the current economy, we have to be concerned about what the long-term effect will be. Congress has thrown $5.3 trillion at the crisis in just 12 months, and President Biden is proposing another $1.9 trillion stimulus package. There is now a record $18 trillion in negative yielding debt. (Source: Bloomberg)
For those who follow details of the economy, we know that government inflation rates do not include several factors that impact consumer spending. We can expect interest rates to move higher in coming years, and bond yields will struggle to keep up. This especially impacts the investor who uses bonds for the fixed income allocation of his or her portfolio. Every week, cryptocurrency gets more attention —we are now trying to understand a new currency that has global impact without knowing exactly who is in control of it.
By almost every metric, stocks are expensive while the risk/reward for bonds is very unattractive. So we must ask whether this is a repeat of what happened in the roaring 20s over a century ago? Are we eating a fiscal diet of sugar? We know that sugar is sweet and really makes things taste good, but what is the long-term effect?
Use good judgment. Make financial decisions that are appropriate for your investment time frame. In certain situations you should have funds that are guaranteed against loss and held by financial institutions that are safe and secure.
According to the NFL, the percentage of Hail Mary passes that result in a touchdown is just 2.5%! A good life is about so much more than money, but the lack of money can make a good life very difficult. Plan well to live well.
