Equity Update

Stock market optimism from continuing fiscal and monetary stimulus efforts in addition to vaccination progress, drove stocks higher in the first quarter. Major equity indexes moved higher with the energy, financial and industrial sectors leading in the first quarter. LPL Financial’s year end S&P 500 estimate is currently 4,100, which was increased in February. We are fast approaching that target not even half way through the year, so it shouldn’t come as a surprise to see upward revisions as the economy reopens and more vaccines are distributed.

Despite the potential for a strong rebound in 2021 and 2022, there are near term risks that can’t be ignored. As we have seen the past year, Covid-19 is not going away. The potential for virus variants that may be more resistant to vaccine efforts will be an ongoing battle, and it still is not certain for how long an individual will have immunity after vaccination. In addition to virus concerns, Americans are also facing potential tax increases and tougher government regulations from the Biden Administration.

Fixed Income Update

Bonds are going to be in a challenging environment for the foreseeable future. Yields are still historically low, reducing the income bond investors can expect. In the first quarter yields rose across all fixed income sectors, with the 10-year Treasury yield reaching 1.74% as of March 31st, the highest level since January 2020.

In Warren Buffets’ most recent Berkshire Hathaway shareholder letter, he says “Bonds are not the place to be these days. The income recently available from a 10-year U.S. Treasury bond was .93% at year end-fallen 94% from the 15.8% yield available in September 1981. Fixed-income investors worldwide-whether pension funds, insurance companies or retirees-face a bleak future”.

While fixed income investments may continue to provide diversification benefits and stability during stock market turmoil, investors hoping to generate meaningful rate of return through “safe” bonds will either need to reposition their portfolios or adjust their expectations.

Macro Overview

The prospect of resurgent inflation has developed into a growing concern for markets globally. Some believe that current inflationary pressures may be transitory and not lasting, while others contend that higher prices may become more permanent. Optimism surrounding a third round of stimulus payments along with rising vaccination rates fueled equity markets in March as an economic revitalization began to take hold.

The pandemic has brought about modifications and changes to business models throughout numerous industries, many of which are passing along higher costs to consumers. Many of the higher cost trends are not being recognized by some government inflation gauges and not accounted for in forecasts. The suggestion that inflationary pressures are only temporary are being contested as a growing number of businesses are expected to make pricing changes permanent.

In addition to stimulus payments, the $1.9 trillion bill passed in March will provide an exemption on taxes paid on unemployment benefits up to $10,200.  A $2.25 trillion infrastructure plan introduced by the administration is expected to focus on transportation, clean water, high-speed broadband and manufacturing. Rising fiscal deficits combined with increasing levels of federal debt are prompting the administration to explore the most significant tax hikes since 1993. Tax increases are being considered for corporations, businesses structured as pass-through entities, individuals, estates, and capital gains.

We hope you have remained healthy and please let us know if you have questions or comments!