Client Letter 2021 Q1

Q1 2021 Market Results

The first quarter of 2021 proved to be another good one for both U.S. and global markets.  The S&P 500 was up +6.17% hitting new all-time highs in March.  International equities were up a still respectable +3.48% and Emerging markets were up slightly less at +2.29%.  Bonds were down -3.37% as we are seeing rising interest rates (always bad for bonds).  Short-term treasuries were down less at -0.05%, which clearly shows the portfolio buffering that can be achieved using U.S. treasuries.  The combination of higher interest rates and buying pressure on stocks weighed on bond performance.

Portfolio Thoughts

Portfolios did well in the first quarter.  Tactical portfolios benefitted from the small cap exposure and our overweight of that asset class.  An overweight we committed to Value along with an underweight to Growth also contributed to positive results.  Strategic portfolios did slightly better than Tactical portfolios, which is not always the case.  We feel this was a combination of our rebalancing efforts, small cap exposure and very low cost investment structure.  Momentum portfolios did well, but once again lagged Tactical and Strategic due to its lack of small cap exposure.  This can be an inherent weakness of the momentum portfolios, especially during economic recoveries when small caps can outperform.  We don’t feel it will last for an extended time.  The momentum model continues to indicate we remain fully in U.S. investments, which as you can see from the international and emerging market returns continues to be a good call.  The indicators we noticed last quarter of a possible shift toward global investments has so far turned out to be short-lived.  Our Capital Preservation strategy did OK, but not great.  Rising interest rates had a negative impact on bonds, which represents about 80% of that portfolio model.

For the most part, I think it is safe to say that markets are responding in a very positive way to what appears to be a pending recovery from the pandemic.  Although, I remain cautious and want to point out that the economy is still smaller than it was in January of 2020, pre-pandemic.  And yet, the S&P 500 hit new all-time highs in March 2021.  My general feeling has been that the market is trading ahead of itself.  As a forward-looking vehicle, the market is forecasting greater economic activity and higher corporate earnings as justification for its trading levels.  But that activity and those earnings aren’t here yet.  Thus, I believe a pullback, or market correction, is possible.  I’m not predicting it as it doesn’t have to happen, but I feel it is important to recognize that it could.  That said, I agree overall with the idea that we are in recovery mode and the S&P 500 will end 2021 in positive territory.  With our year-end S&P 500 forecast being 4,100, if we do see a correction, we expect it will be temporary.

Q1 2021 Notes

Lots to talk about from the first quarter of 2021.  Politically, we have one party in control of all three branches of government, which has changed the dynamic noticeably.  Granted, the Democratic majority is very small, but a majority nonetheless.  The year 2020 saw tremendous government stimulus with the $2 trillion CARES act passed in March, then the $900 billion “pandemic relief” package passed in December, for a total of $2.9 trillion in 2020 stimulus spending.  Don’t get me wrong, I believe if the CARES act had not passed in March, we would have been talking about a pandemic depression, not recession.  I’m a bit less convinced of, but still support the December measure.  Then 2021 hit with a new President and this March a third $1.9 trillion dollar stimulus package passed using the majority 51 vote reconciliation process in the Senate.  I’m a bit more skeptical of this package as a review of the details shows only about 10% of the spending directly tied to COVID-19 relief.  Add to that another 49% of the spending in less-direct COVID relief, such as support for state and local governments, which I support.  The remaining 41% of the spending is somewhat harder to identify, and from what I’ve found, seems much more politically driven.  In total, that adds up $4.8 trillion in government stimulus spending in less than 18 months.  That’s an astounding amount of money and let’s be clear, it’s all borrowed.

So, we have substantial amounts of government money being spent, and as I’ve discussed before, a good amount of this money is being injected directly into the economy.  Judging solely by the amount of M2 money (M2 consists of cash, bank notes & deposits), which is up over 25% in the last year (normal annual M2 growth is about 6%), we can start to see why interest rates are rising.  That amount of M2 growth is driving concerns of runaway inflation based on the teachings of Milton Friedman, as mentioned in last quarter’s letter.  As inflation fears and predictions rise, interest rates get bid-up mostly in the intermediate to long-term maturities.  This is why 30-yr mortgage rates were 2.77% at the end of 2020, and hit 3.42% this past March.  Still a low rate in the grand scheme, but a very noticeable rate of increase for sure.  For this reason, at least in part, the Federal Reserve (Fed) continues to hold short-term interest rates near 0%.  Some of this is driven by their desire to encourage lending and spending within the economy, but some of it has to do with the near $5 trillion in recent borrowing by the government and trying to keep the interest payments on that debt as low as possible.  The Fed has a careful balancing act to manage because part of their mission is to maintain stable pricing, so any kind of accelerating, or runaway, inflation would indicate that interest rates need to move up, starting with short-term rates.  Inflation and interest rates are very important to investing, and we watch them closely.  Modifying investment choices and allocations are entirely possible as we watch to see how inflation and interest rates adjust over time.

Thinking about the pandemic, recent developments are encouraging.  We now have three vaccines in circulation with nearly 2 million vaccinations happening each day.  The much talked about herd immunity we hope to achieve is considered as possibly happening by the end of April, with more skeptical experts predicting end of June.  Either way it seems we can look forward to a summer and fall with our world getting closer to normal compared to what we experienced in 2020.  I certainly hope that is true.  In general, I feel more positive about our future now than I did at the beginning of the first quarter.  On a more somber note, COVID-19 leaves a devastating legacy.  It has caused over 550,000 deaths in the U.S., or 1,722 deaths per million people.  That compared to 666 deaths per million for the 1958 Asian flu, or 502 deaths per million for the 1968 Hong Kong flu.  Clearly, COVID-19 is one of our worst pandemic experiences, though still nowhere near what was seen in 1918 with the Spanish Flu having 6,540 deaths per million, more than three times the COVID-19 death rate.  Sometimes, when things seem bad, it’s good to consider how much worse it could be.

As always, we will watch and research the global economy and make investment choices to the best of our ability for each and every client portfolio.  If you have questions about your portfolio, our views expressed in this letter, or anything else financial, please do not hesitate to call.

Best Regards,


Barron Financial Group, LLP is a fee-only Registered Investment Advisor regulated by the Connecticut Department of Banking.

This newsletter is for general information only and should not be considered investment advice.  Investors should consult with a trained investment professional to discuss their particular situation.