Quarterly Market Review and Outlook
2020 Look Back & Q1 2021 Market Re-Cap
This time last year, we all watched as COVID-19 spread from China across the globe. In the U.S., many
businesses closed due to government induced shutdowns, hospitals began to fill quickly with the infected
and the stock market experienced a dramatic two-month decline. Combined with social unrest and an
upcoming election cycle, it seemed as though we were living in an alternate reality.
While we may have not yet completely returned to the pre-COVID way of life, we are truly thankful that
somethings are starting to feel a little familiar. Most cities and states have allowed restaurants to reopen.
Many religious organizations have reopened their services. Public gatherings seem to be allowed or will
be in the near future.
We are also thankful that we were able to serve you through the extraordinary previous twelve months.
Generally speaking, we were in the office every day. Thank you for your patience and confidence. Thank
you for your commitment to our conversations on maintaining your goals and objectives despite all of the fear mongering and unknown. We look forward to the next twelve months and beyond in continuing to serve you and your families!
As we look at the previous 3 months, we continue to see confirmation of a trend that began in late
2020—the technology giants that roared out of the depths of the financial chaos in 2008 are lagging their more stalwart counterparts. For the year, the tech-heavy NASDAQ is flati, while the Dow Jones
Industrial Average is up approximately 8%.ii Small cap stocks also outperformed.iii We have not seen a
cycle in a long time where value has outperformed growth and small cap has outperformed large cap.
We expect that to continue.
There has been a significant change in the bond and fixed income market. As we try to often remind our
clients, the fixed income market is substantially larger than the equity markets. Additionally, we generally suggest holding fixed income assets to act as a stabilizer against unexpected stock market volatility. This does not mean that these investments never decrease in value. This is especially true when interest rates spike as they have over the last several months. So far in 2021, the US fixed income
market as measured by the U.S. bond aggregate has declined by approximately 3%.iv We have worked
extremely hard on our bond allocations and are happy to report we have done much better than the
market average, but it has been like a knife fight in a phone booth.
2021 Q2 Outlook & Beyond
Inflation On The Horizon?
A very common question that we currently get is, “when is inflation going to hit?”
For those that remember the late 1970s and early 1980s, inflation often invokes memories of double-digit home mortgages, rapidly escalating gas prices and robust CD rates. At this moment, we are not close to those conditions. On the contrary, the banking system just experienced the most robust refinance market in recent memory due to all-time low rates. Savings accounts and money market rates are generally paying in the .10% annualized range.v
However, it would be foolish to completely dismiss the idea of higher inflation. The Federal Government
is on a spending spree unlike anything we have ever seen. The U.S. government’s debt has ballooned
from $23 trillion in early 2020vi to more than $28 trillion currently.vii
That does not include the $1.9 trillion “stimulus bill” that recently passed. Also, a $3 trillion “infrastructure bill” was proposed a few days ago. We are printing money like never before and that should be inflationary.
With that being said, we currently do not see inflation as a significant problem over the short term.
First, a lot of the stimulus funds from 2020 and early 2021 will largely offset the reduction in productivity as measured by GDP. Said simply, the U.S. economy dug a large hole last year, the stimulus mostly just filled the hole. Further, most economists that we follow suggest that unemployment won’t return to pre-COVID levels for another year or two. Money generally finds its way to the neediest areas first (i.e., rent, mortgages, car payments, utilities, food, etc.). While food prices are volatile, the rest of those expenditures are fairly stable.
Second, the data says that inflation is not currently an issue.viii The Federal Reserve has repeatedly
stated that they would like to see inflation (as measured by Personal Consumption Expenditures Price
Index) consistently run above 2%.ix Inflation in the U.S. simply isn’t currently at 2%+ and the Federal
Reserve wants to see that level more than just randomly.
Finally, it takes time for liquidity pumped into the economy to have an impact. In the most recent
stimulus bill not all of that $1.9 trillion is going to find its way immediately into the hands of Americans.
Some of it will go to states, cities, hospitals, school systems, etc. Some of the package is geared
towards tax credits starting in 2021. A portion to small businesses, health insurance subsidies, Medicaid,
and vaccines.x In short, the bulk of the $1.9 trillion is not going to people for immediate spending.
It is likely that inflation will pick up over the coming years as the economy fully recovers and people
return to work. When that does occur, we would expect the Federal Reserve will try to fight inflation with their standard tactics of higher interest rates as well as a few others. The economy is a cycle—we just need to stay vigilant of where we are in the cycle. All this debt will surely cause issues for the U.S.
economy, we just think those issues are down the road instead of right in front of us.
U.S. Stock Market Thoughts
As you have likely heard us say, we are big believers of value and buying things when they are on sale.
Currently, on the surface it does not appear that the stocks are cheap. Some valuation data that we
track suggests that certain stocks are extremely expensive from a historical perspective.
We would suggest that it is also important to not view the stock market as a whole. In other words, just
because some technology stocks are expensive does not mean that all stocks are expensive. There are
pockets of value and we are always on the lookout for those areas where stocks are more reasonably
Also, money has to land somewhere. You can spend it, or you can save and invest it. There are not a
lot of other options. If we are looking at saving and investing, then the question should be asked, “if I’m
not going to invest in stocks, then where should I invest?” Bonds, money markets, bitcoin, gold,
commodities, real estate?
Cash investments like certificates of deposit and money market accounts are paying historically low
interest rates. Bonds have faltered recently and if inflation does become an issue, then traditional bonds
are in a tough spot.
We can, and do, look at alternative options such as real estate and commodities. However, these
typically offer a lack of liquidity. We also should not forget the volatility experienced in real estate in 2008 and commodities last year.
Said plainly, there is no perfect investment asset. Rather, we would suggest that despite the run that
stocks have been over the last several years, they still very much have a place in portfolios with a
medium to long-term horizon. We favor value over growth. We continue to prefer U.S. stocks to
international stocks. We like small caps as opposed to larger companies. As dysfunctional as we
sometimes feel the U.S. economy is, we remain the global economic engine with the best overall
package of trade, infrastructure, freedom of economy and rule of law.
In short, we are positively constructive on the U.S. stock market this year. There are plenty of things
noted above that give us some caution, not to mention heightened geopolitical risk in the world, but we
think stocks should largely grind higher over the course of the coming quarters.
Financial Independence Planning
As you could probably imagine, a significant percentage of our client conversations centers around
retirement or financial independence. Most people dream about having a secure retirement. They would
prefer at some point to work if and when they want and devote their time to other areas like their family,
their church, their philanthropic interests, their hobbies, etc.
As you would expect, the bulk of the money people save towards retirement occurs in their employer-sponsored retirement plan. This is normal and natural as many of those types of plans offer matching
contributions and the benefits of tax deferred growth. Free money for saving for retirement and kicking
the can down the road on taxes. What’s not to like?
However, there have been significant changes to qualified plans rules over the last couple of years.
Also, distributions from tax-deferred accounts are generally subject to income taxes.
As we previously mentioned, the Federal government has a bit of a debt problem (understatement of the
year). We fully expect a tax increase to pass this year. We will have to wait and see if it applies to 2021
or 2022 earnings—anything is possible.
To mitigate the impact of higher taxes, we suggest that clients consider diversifying the tax treatment of
In some cases, we are big fans of Roth IRA and 401k contributions. Roth contributions are made with
after-tax dollars but the withdrawals are tax free—earnings and all. Of course, there are rules you must
follow, but tax-free withdrawals can offer retirees a significant advantage on their withdrawals when they retire. Feel free to give us a shout if you have questions about a Roth and to see if you could benefit from one.
Another option to consider is a non-qualified account. You pay taxes yearly from these accounts based
on the generated interest, dividends, and capital gains. However, there are some potential long-term
advantages. First, under current tax law, generally the tax rate of dividends and long-term capital gains
is less than the income tax rate. And the tax is only on the gains and dividends—not the entire
distribution as in an IRA or 401k. Second, there are some investments that can be utilized that provide
tax-efficiency such as municipal bonds. Third, if there are tax losses within the account, it is possible to harvest those losses to offset gains. For clients that had these types of accounts in 2020, we diligently looked for opportunities to reduce tax burdens when the stock market stumbled. Finally, under current tax law, it is generally possible to execute more sophisticated strategies related to inheritance and estate planning, long-term care planning and philanthropic giving with non-qualified accounts than qualified accounts.
Again, we bring this up to remind our clients that diversification in a well-constructed financial
independence plan should go beyond just investment diversification. The tax rules are always changing.
It makes sense to have more than just one tool in your toolbox for when those changes occur.
***Quick tax note. Many of you have seen that the IRS extended tax filing day to May 17th. On March 30th, the IRS also announced an extension of the IRA contribution deadline to May 17th.xi If an IRA or Roth IRA contribution for 2020 is something that you would like to consider, please let us know.***
We hope that 2021 has gotten off to a better start for you than it did for most people in 2020. It is our
hope and prayer that you and your family are healthy and are beginning to feel at least a little more
comfortable gathering with your friends and families. We would encourage you to find the positives that
are present. Resist the temptation to make rash and emotional financial decisions based upon a news
article or some talking head. If anything, the last twelve months should have taught us that there are
always brighter days ahead and that patience pays off.
As always, should our thinking or analysis change, we will not hesitate to communicate accordingly.
Thank you again for your continued trust and confidence!
Have a great Spring!
Securities offered through First Heartland Capital ®, Inc., member FINRA/SIPC. Advisory Services offered through First Heartland ® Consultants, Inc. Walker, Higgins & Associates, LLC and Walker, Higgins & Associates Wealth Management, LLC are independent of First Heartland Capital ®, Inc. and First Heartland ® Consultants, Inc.