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May 2021 Monthly Review

"This is the Most Beautiful Sight These Eyes Have Ever Seen"

By Loyd Johnson, Chief Investment Officer
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Loyd Johnson PhotoA Look Back

The title above comes from the classic feel-good football move, Rudy. Ned Beatty, who plays the hard-working father of the dreaming Rudy, utters this line when he gets to his seat on his first trip to Notre Dame Stadium. He had been a lifelong fan, but had never ventured to the hallowed ground, and as he looked out on the greenest of grasses and the big crowd he tearfully muttered the above line to no one…and everyone. The line rings especially true as we see people heading back to restaurants and sporting events…and even work with the ever-increasing traffic. They are signs that life is at least starting to get back to some type of normalcy. We can see our neighbors faces again (That’s usually a good thing).

Through it all, our markets continually show the kind of resiliency it has shown over the last century. Bad times come and go…followed by similar ups and downs that are triggered by too much pessimism/optimism. It is the nature of how things roll. It is why it is so important to have a game plan up front. We then adjust that game plan as circumstances demand and move forward. It is the nucleus of what has worked so well over time.

The month of May finished positive in almost all of the major asset classes after a troubling start brought on by inflation concerns and a healthy retreat in many of the Cryptocurrencies. Bitcoin, for example lost around a third of its value over the first two weeks of the month. The inflation rate for the United States was 4.2% for the 12 months ended April 2021 after rising 2.6% previously according to the U.S. Labor department. The anecdotal evidence can be seen all around us. We are paying more at the gas pumps. If you are in the midst of any renovation project, you know the price of lumber is up 200-300%. Existing home prices across the country are historically high. In many places buyers are paying 15-20% through the asking price and still losing out to higher bidders. Prices are higher…and that includes stock prices. It should be noted that a typical 60/40 allocation portfolio has been a decent hedge against a rise in inflation in the past. This has been especially true in the earliest stages of rising inflation. As everything else gets bid up, stock prices tag along for the ride.

Through the first five months of 2021, the S&P 500 is up nearly 13%. That equates to a plus 30% annualized return! The big drag for most investors has been on the fixed income side. The benchmark Bloomberg Agg was up in May, but still remains negative for the year by over 2%. A typical balanced portfolio is up around 4-5% so far this year…again not too bad, all things considered.

A Look Ahead

We look ahead with continued optimism and a healthy dose of realism. There is little doubt that there is pent up demand from consumers to spend money. Restaurants, amusement parks, sports teams, casinos, airlines and more should all benefit from the desire by many to enjoy some pre-pandemic activities. Some would argue that the rise in stock prices that we’ve already seen was in anticipation of that reality, and that additional stimulus…either governmental or otherwise will be needed to keep momentum going. We remain constructive in the short-term but believe that the amount of government spending will have to be reckoned with at some point. For now, we look to trim equity positions when needed to get back to a neutral base. The Fed Funds rate still remains at zero providing some cover for stocks. We believe it is okay to be a little wary and still enjoy the beautiful sights…just like Rudy’s dad.