Markets Strong but Correction Looming
Sometimes it’s okay to follow the crowd, and given the economic, monetary, and fiscal backdrop this is one of those times. The U.S. economy is opening up quickly and is clearly not waiting for herd immunity. Most concurrent and leading indicators are flashing green with ISM and PMI both exceeding all-time highs last week. Rarely are both the services and manufacturing sectors hitting on all cylinders at the same time, and the stock market’s recent performance reflects the current optimism about broad economic strength. Most asset classes had a strong first quarter with large cap technology lagging.
While we think the shift toward Value sectors over the last six months has been justified, we still believe a balance between secular growth and undervalued equities is the best approach. Currently, keeping equity exposure at the top end of our target range is justified and should provide the best returns for the balance of the year. Fiscal and monetary support will not wane even in the face of increased inflation expectations. The Federal Reserve has made it very clear in their minutes this week that they are willing to tolerate a significant amount of inflation in pursuit of higher employment. While job gains over the last six months have been strong, unemployment is still above pre-pandemic levels. New record job opening numbers, however, could push us toward full employment as the economy opens up.
The fixed income market has struggled in the first quarter given higher rates, and our allocations have been at the low end of our target range. The great unknown is how far will rates climb and at what point will it impact the equity markets. Although reflation has gained momentum, the growth-driven rates sell-off has kept corporate spreads tight.
We maintain our recommendation to actively manage duration exposure with a preference for private debt and ultra-short funds. There are very few things on our radar that could upend this recovery which is worrying in and of itself. Complacency and speculation are very high, as well as valuations. These three can coexist for a while, but severe and quick corrections tend to follow such periods and we are due one of those correction soon!
Policy changes out of Washington, including tax increases above current expectations, as well as Chinese or Russian geopolitical risk or any shortfall in corporate earnings growth could put a damper on equity valuations this year, but we place a low probability on these occurring. In fact, 2021 earnings could really surprise to the upside. What’s most difficult is finding pockets of value as the market inflates, but we will stay disciplined in our process as we continue to navigate this market.
Please call or email me with any questions or observations at email@example.com or 843-412-1420.
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