April 2021 Monthly Review
By Loyd Johnson, Chief Investment Officer
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A Look Back
The King had it right. "We can’t build our dreams on suspicious minds." Elvis recorded the song in 1969 and it was his 18th and last number one single in the United States. It helped revive his career after his 1968 Comeback Special. Rolling Stone went on to rank it #91 on their list of the 500 greatest songs of all time. It hit home when hearing it recently, as there seems to be growing suspicions all around us. When will we get back to normal? Are all of the vaccines safe, or even needed for every age group? Are cryptocurrencies a real asset class, and can they just keep going up? While we may not have all of those answers right now, we do know that it is extremely difficult to move forward successfully in anything we do with too many suspicions lingering.
There were few issues in the month of April in most asset classes. The broad-based S&P 500 was up over 5%, and is now positive by nearly 12% over the first four months of 2021. This is after delivering an 18% return in the pandemic year of 2020. Although not nearly as robust, small-cap domestic and international stocks were strong as well for the month. Importantly, the core fixed income benchmark bounced back in the month, posting a return of .79%, a welcome change from the negative first quarter. In a balanced or traditional 60/40 allocation, the core bond exposure has really been a drag on performance over the first third of the year. While the Bloomberg Barclays Agg has historically delivered around 5.5% annually, the first third of 2021 is a reminder that we can see negative returns from that asset class in times of rising interest rates.
The 10 year U.S. Treasury, for example, began the year at a .92% yield and ended April at around 1.65%...a significant rise over four months. Other asset classes like Real Estate and Commodities have fared well in this "anything but cash" landscape. Most of the economic releases in April were in line with expectations and showed an economy that was recovering quite well from a global pandemic that had started a year ago. The just-released Jobs report for April was a big miss, however, as non-farm payrolls increased by 266,000 versus consensus of 1 million. Many restrictions were either lightened or lifted as vaccines continued to make their way into arms. First quarter earnings blew through analysts’ estimates as well over 80% of the companies in the S&P 500 beat consensus expectation.
A Look Ahead
Another line in the Suspicious Minds song is "we’re caught in a trap." There is a sense that this cycle of more stimulus = more money to buy stocks = continuous higher prices may have unintended consequences. The level of government spending and the dramatic bloating of the Fed balance sheet are cause for concern. If it were that easy to just spend our way out of any economic malady, we could have been doing that for decades! Just like in our own households, there are costs. Perhaps we have to pay more interest, or we can’t spend money on other worthy projects. Further, if we take on too much debt, there are pretty clear, painful consequences. None of this is meant to necessarily sound the alarm, or even to suggest that stock prices can’t go higher. They can, and eventually will. Rather, we are always looking at balancing potential risk with potential return. We do not love the implication that stock prices have to go higher because there is no other alternative. That can work for a while, but isn’t something to hang your hat on. We continue to believe in what has worked over the long haul…sticking to our asset allocation and reducing risk when appropriate…and to be appropriately suspicious.