Q1 2021
The 1935 PWM Team williamblair.com Global Market Review and Outlook First Quarter
Index 1Q 1Y 2020
S&P 500 US Large Cap 6.17% 56.35% 18.40%
DJIA US Large Cap 8.29% 53.78% 9.72%
Russell 3000 Growth US Multi Cap Growth 1.19% 64.31% 38.26% Tom Wilson, Partner [email protected] Russell 3000 Value US Multi Cap Value 11.89% 58.38% 2.89% +1 312 364 8855 MSCI EAFE Developed International 3.48% 44.57% 7.82% MSCI EM Emerging Markets 2.29% 58.39% 18.31% Bloomberg Barclays US HY US High Yield 1.09% 23.61% 6.40% Bloomberg Barclays US Agg US Core Bond –3.37% 0.71% 7.51% Bloomberg Barclays Muni US Muni Bond –0.35% 5.51% 5.21% Dick Gottfred, Partner MSCI US REIT US Real Estate 8.76% 37.69% –7.57% [email protected] +1 312 364 8732 Source: Bloomberg
It is hard to believe it was just a few months ago the year began with Georgia’s runoff election finalizing a Democratic majority in the Senate, disquieting riots took place at the Capitol, and President Biden was sworn in as the 46th president. Although these were impactful events for our country, our capital markets have focused on the actions that Lindsey Holton followed, including the now successful rollout of the vaccine across the United States, [email protected] additional stimulus from the Biden administration, and further economic and employment +1 312 364 5151 improvements as our economy continues its reopening. Economic growth in the United States in the first quarter is tracking at an impressive 6.0% (according to the Atlanta Fed’s GDP Now tracker) and would have been even stronger had January and March’s strong activity not been interrupted by February’s wild winter weather in the southern United States, particularly in Texas, which caused a sharp reduction in activity in the region. Unemployment managed to fall from 6.7% at the end of 2020 to just 6.0% through the end of March, a quarter in which we also saw the return of 1.6 million jobs. This means, however, Ray Lombardi that we are still 8.4 million jobs shy of the number employed before COVID in February 2020. [email protected] +1 312-364-8858 While the rollout of the vaccine in the United States and the United Kingdom has been impressive, this has not been the case in other developed market economies—in particular the EU and many emerging markets, where distribution has been too slow and uneven. While Israel has been the standout example of how to get it done, with 61% of the population with at least one dose, activity in the United Kingdom and the United States has also been impressive, with a respective 46% and 32% receiving at least one dose. As the EU has struggled with the vaccine over the past quarter, with only 13% of residents now being vaccinated, Manny Hodzic political tremors across the Eurozone are being created and may cause election headaches [email protected] for politicians such as Merkel and Macron. As new variants of COVID-19 emerge, the race +1 312-364-8274 between the vaccine, COVID-19, and its variants continues. Q1 2021
The 1935 PWM Team Global Market Review and Outlook williamblair.com
E HIBI 1 U.S. 10-Year Yield
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0 2017 2018 2019 2020 2021
Source: Strategas Research Partners
Given the damage COVID-19 has inflicted on global econo- comprises a broad swath of debt, including Treasurys, quality mies, and the fear of more to come from any variants, global corporate bonds, and asset-backed securities—fell by 3.4% central banks and governments continue to provide stimulus in the quarter, making it the largest quarterly loss since the in the form of both fiscal and monetary policies. There is index was down 8.7% in the first quarter of 1980. Tellingly, little question fiscal policy has been a huge driver of growth however, corporate credit spreads remained exceptionally in the quarter; the Trump administration not only passed tight across the curve, suggesting that the sell-off was the $900 billion COVID relief act at the very end of December, not associated with any current or expected credit concerns. which included another round of $600 checks to most American households, but also helped avoid another For equity market investors, the 6.2% return for the S&P 500 government shutdown related to the debt ceiling. This was in the quarter suggests that the rise in longer-term interest swiftly followed by the Biden administration’s March passage rates was similarly being seen as more the result of economic of the $1.9 trillion American Rescue Plan, geared toward reflation rather than inflation, with the result being a strong providing an immediate boost to households and additional rotation in the underlying sectors within the equity market support to the economy to help prevent any longer-term itself. This meant a shift back toward the relatively less scarring related to lingering high levels of unemployment. expensive smaller and economically sensitive cyclical This plan also included yet another batch of stimulus checks, stocks. This rotation came at the expense of the “growthier” with up to $1,400 issued to qualifying Americans. Just as technology stocks that had benefited so greatly during the quarter ended, President Biden also unveiled plans for the the initial phase of the COVID market recovery beginning passage of yet another $2.3 trillion supply-side infrastructure at the end of the first quarter of 2020. Such a rotation spending initiative, deployed over the coming eight years. can be viewed as a healthy base building for the broader market, helping ease some concerns that performance was Needless to say, this amount of fiscal spending caused becoming too concentrated in just a handful of names— some angst in the fixed-income markets with increasing e.g., the FAANGS—and also as a chance to catch up with the expectations for a near-term cyclical bounce in inflation. continuing innovation wave. Importantly, earnings results Perhaps not surprisingly, this led to a dramatic sell-off in U.S. and future earnings expectations across all sectors of the government Treasurys, whereby 10-year T-note yields economy continue to trend higher. Forward earnings increased from just 0.93% at the end of last year to 1.74% at expectations for the S&P 500 are now higher than pre-COVID the close of the quarter (see chart). The net result was the estimates, with all sectors of the economy contributing to Bloomberg Barclays US Aggregate Bond Index—which this improvement (see chart). Q1 2021
The 1935 PWM Team Global Market Review and Outlook williamblair.com
E HIBI 2 S&P 500 Forward 12 Month Blended EPS Progression
190
1
180
e 2 20 170
160
150
140
e 1 20
130 an. 20 pr. 20 ul. 20 ct. 20 an. 21 pr. 21
Source: Strategas Research Partners
As we lap the broad shelter-in-place mandates and stock and emerging, have stumbled at the two main hurdles: the market lows witnessed in March last year, we are able to vaccine rollout and fiscal stimulus. The EU has managed to focus on the positive developments over the past year. make further progress on its €750 billion coronavirus relief Broadly speaking, consumers are in healthy financial fund (Next Generation EU), and while it is likely to ultimately positions, with the personal savings rate greater today than pass, it is not clear if the member states will even be allowed one year ago. Corporate balance sheets are also flush with to tap into their allocated funds, for fear of breaching their record cash, and CEOs’ confidence forecasts that they are mandated deficit rules. Many emerging markets, meanwhile, ready to deploy these funds to fulfill increasing consumer have continued to struggle with the lack of fiscal space to demand, replenish still-low inventories, and improve supply adequately support their economies as the pressure from the chains as more and more companies move manufacturing virus and more limited international trade have hindered onshore. A reflection of this increased economic activity is their economies. In the past quarter, the strengthening of the the ISM Manufacturing Purchasing Managers Index (PMI) dollar and higher interest rates are also increasing pressure at levels last witnessed in the 1980s (see chart). on these countries, and some, such as Brazil and Turkey, have already been forced to start increasing their interest rates Internationally, economic and market performance has not to help stem losses and shore up their economies— a response been quite as robust, given many countries, both developed that may end up causing further disruptions down the road. Q1 2021
The 1935 PWM Team Global Market Review and Outlook williamblair.com
E HIBI 3 U.S Manufacturing PMI
80
70
60
50
40
30
20 1980 1985 1990 1995 2000 2005 2010 2015 2020
Source: Strategas Research Partners
On a global scale, the reality is that we are still not yet out of the woods with regard to the vaccine rollout, the race against any potential variants, or repairing damaged economies. In the past quarter, it has also been clear that the global economy has been starting to head in different directions, with the United States continuing to put its foot heavily down on the accelerator and the EU and many other emerging markets still struggling to come together. In such an environment where volatility will remain high, our focus on active portfolio management is imperative. We look forward to our conversations together as we move through this year, and, hopefully, meeting together in person soon.
Thank you for your continued trust and confidence.
The 1935 Wealth Management Team
The opinions expressed in this report are not necessarily the same as William Blair & Company L.L.C.’s Equity Research department. This information should not be construed as a research report, as it is not sufficient enough to be used as the primary basis of investment decisions. This information has been prepared solely for informational purposes and is not intended to provide or should not be relied upon for accounting, legal, tax, or investment advice. We recommend consulting your attorney, tax advisor, investment, or other professional advisor about your particular situation. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions. Any investment or strategy mentioned herein may not be suitable for every investor, including retirement strategies. The factual statements herein have been taken from sources we believe to be reliable, but accuracy, completeness, or interpretation cannot be guaranteed. Past performance is not necessarily an indication of future results. All views expressed are those of the author, and not necessarily those of William Blair & Company, L.L.C. “William Blair” is a registered trademark of William Blair & Company, L.L.C.