APW Investment Committee Q1 2021 Commentary
Q4 2020 Review
The US equity markets rallied strongly in the fourth quarter of 2020. The S&P 500 total return was 12.1% while the small cap Russell 2000 surged 31.4%. International equity markets also did well with the MSCI Emerging Markets Index improving 19.3% and the MSCI Developed EAFE up 16.1%. The US Treasury benchmark 10 year rate continued to rise from the almost 40 year bottom made on August 5, 2020 of 0.52%. As of January 13, 2021 the 10 year Treasury interest rate is at 1.15%.
The primary drivers of the rally were the anticipation of COVID-19 vaccines which arrived in November and the $900 billion coronavirus aid package signed by the President on December 27, 2020.
- No model changes were made in the quarter.
As professional investors, Austin Private Wealth tries to take in as much market information and insight as possible. In today’s world that can be an overwhelming task. As a result, we utilize a framework for thinking about the relative importance of information. This can help us attempt to stay calm and maintain perspective while still listening to the constantly high volume of financial and political media.
|One||Localized||New products, stock scandals, general politics, investment fads
|Two||Industry or country specific||Tax policy changes, regulations, political scandals, technological advancements
|Three||Global||US interest rate or US dollar changes, inflation, war, pandemic
The level of diversification in our portfolios allows us to pay less attention to the noise in Tier One and even, to a reasonable extent, in Tier Two that ebb and flow while global commerce marches on. Sometimes items start in Tier One and move all the way up to Tier Three, so it is important for us to know about all of it, but only start to consider portfolio changes as things evolve. In this way, we hope to be the patient stewards of your capital for years to come.
Recent events in our country and around the world, however seem only to be Tier Three (or at least high Tier Two) in nature! The political crisis triggered by the disgraceful riot at the Capitol, the more than 4,000 deaths per day from COVID-19, the rally in the long-term US Treasuries, and the decline in the US dollar all are items that require careful consideration. The fact that markets have continued to march higher in spite of these historic events only speaks to the power of extremely low US interest rates and maximum liquidity provided by the Federal Reserve.
Speculative areas of the US equity market have entered extremely stretched valuation conditions due to this liquidity, as have other speculative trades such as cryptocurrencies, and even collectibles. Nonetheless, until liquidity is pulled out of the system by higher rates or the Fed stopping bond purchases (Quantitative Easing) we are unlikely to see a dramatic reversal of equity prices. Here are a few charts that illustrate the extreme liquidity.
The yield curve has steepened significantly – a sign that the bond markets see better economic times ahead. We fully believe that as the vaccine roll outs continue and the political inevitability of the next administration starts to lower the rhetoric and passions of the political class, Spring will arrive to the US and global economy. Given how much money is in the system, the question we are asking is, “Will the economic boom be too much, too quickly?” In other words, “Do we see inflation coming back, and if so, how much?” Already in Q4 2020, economically sensitive sectors such as energy and raw materials started to rally. The NYSE ARCA Steel Index is up over 50% in the last three months! Most importantly, the Fed has stated that they will allow inflation to run hotter than target levels in order to attempt to regain some of the lost economic output.
We will continue to monitor the state of liquidity and inflation as these will likely be the primary drivers of any changes to your portfolio in the year to come.
- Market data sources: Black Diamond Wealth Platform and Ycharts
Austin Private Wealth, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Austin Private Wealth, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Austin Private Wealth, LLC unless a client service agreement is in place.