Quarterly Commentary: 2021 Second Quarter

Market Themes

Congress funneled $1,400 stimulus checks into many bank accounts in March, and consumers wasted little time in spending the cash. It’s not that some people aren’t saving the checks or paying down debt, but March’s 9.8% rise in retail sales illustrates the idea: If you give us cash, we will spend.

The markets reacted favorably in the first quarter to not only the positive retail sales, but the labor market is showing signs of digging out of a deep hole. Employment peaked at 152.5 million in February 2020, and quickly fell to a low of 130.2 million in April 2020. As of the end of March, it has rebounded to 144.1 million. March added 916,000 jobs, well above forecasts.

If you take the strong economic numbers along with the swift vaccine rollout, there is a lot of optimism that we could see a robust third and fourth quarter.

The fixed income market reacted to fears of inflation by spiking Treasury yields, however the Fed quickly threw cold water on the fears by stating that they do not see signs of inflation and are committed to an easy monetary policy supporting the economy.

Portfolio Changes Since Last Quarter

Overall Asset Allocation

Trade Rationale

Quarterly corporate earnings have continued to be strong and we believe that earnings estimates and price targets may be revised higher over the coming quarters; events that have historically proven to be some of the most potent catalysts for driving stock prices higher.
Given this possible disconnect between market expectations and reality, we expect the rally in small cap, value and cyclically oriented stocks to continue. These are the companies most vulnerable to negative COVID-19 shocks, but favorably positioned to take advantage of a return to normalcy due to the cost controls implemented during the recession and disproportionate exposure to pent-up consumer demand.
Consistent with this theme, we believe there is a potentially attractive tactical opportunity to add exposure to energy stocks, where investors currently may be underweight. Historically, energy stocks have tended to perform well during economic recoveries and in inflationary environments. Furthermore, with much of the downside likely priced-in following years of excess capacity, poor price return and low growth macroeconomic backdrops, energy stocks are trading at attractive historical valuations and may be positioned to surprise to the upside as direct beneficiaries of a potentially synchronized global economic recovery.

Portfolio Performance

The return of March Madness extended from the basketball court to financial markets this quarter, as heavy investor favorites like technology and healthcare stocks were soundly upset by some of the last few years biggest underdogs like small caps and value stocks. This shift in leadership from large cap growth to more cyclically sensitive stocks picked up steam over the course of the quarter as COVID-19 cases dwindled and the public availability of vaccines accelerated, further increasing optimism that the worst of the pandemic was likely in the rearview mirror. The successful reopening of various local economic coupled with trillions in stimulus and planned infrastructure spending in the US helped cause growth and inflation expectations to rise sharply, driving interest rates higher and sparking bouts of volatility that disproportionately hurt long-duration assets.

Asset Class Views

This document is for informational purposes only. It is not intended to provide financial or tax advice or to address all circumstances that might arise. Individuals and entities using this document are encouraged to consult their own financial advisor.