Monday Morning Market Insights: Last Week in Review with Rusty Vanneman, Vol. 11

Good morning and Happy Monday!  

March Madness of the Markets

Last week was another good one for the stock market—even though interest rates rose again.  There were gains across the board regardless of style, size or sector.  That said, smaller companies still led the way on the back of improving national health data and strong economic optimism.  Small caps enter the week on a seven-day winning streak. 

Needless to say, the stock market’s price action has been impressive this year and suggests more gains. One notable positive is that the market strength is broad-based, not just focused in certain market segments. That’s a sign of a healthy market. 

Another positive is that even though some investors may be concerned about buying into a market hitting new all-time highs, a recent study by the research firm RenMac shows that the market tends to have higher returns and less risk in the 3 months after hitting new highs than when it wasn’t hitting new highs. In other words, just because the market is at all-time highs, it doesn’t mean the train has left the station.  

The average stock in the overall U.S. market is now up 22% on the year. The S&P 500 is up 5%. The Nasdaq is up 6%.  As the economy continues to improve, expect smaller companies to continue to outperform as they tend to be more levered to the economic cycle. 

The Week Ahead

Entering the week, the U.S. market is up 67% over the last year. Wow.  And small caps are up even more. The index we follow shows small caps up 99% over the last 12 months, but other small cap indices report even larger gains.  Next week, that number will most likely be even more impressive as we near the 1-year anniversary of the bear market early last year.   

With more good news on COVID and a rapidly improving economy, this year could very well end up being the best year of U.S. economic growth in our lives. Even cautious voices are getting more optimistic. Over the weekend, the New York Times published an article entitled “Here Are 17 Reasons to Let The Economic Optimism Begin.” 

In turn, watch for GDP growth rates to continue improving.  GDPNow, for example, is now at an annualized 8.4% for 1Q21.

What to Make of Rising Interest Rates

The key market to watch remains interest rates. Ten-year Treasury yields closed last week at 1.64%—up another 8 basis points week over week (though its slowest weekly increase of the past month). The narrative is that rates are moving higher as more investors embrace risk and move back into stocks. Another factor is the idea that the reopening economy will stir inflationary pressures.  There are good arguments both ways why we might see inflation, or why we won’t. Either way, be prepared for an uptick in official headline inflation the next few months at least as the bad data from a year ago scrolls off the year-over-year numbers. 

Mentioned last week, but worth mentioning again given the concerns/questions from investors: Investors shouldn’t be scared of rising rates, as Goldman Sachs notes, “History shows that equity funds generally experience inflows when real rates are rising. During the past 10 years, the most favorable backdrop for equity fund flows has been when both real rates and breakeven inflation are rising. This is intuitive given that the dynamic typically occurs when growth expectations are improving.”

What’s On Fire This Week?

There is a fair amount of economic data this week to consider, including Retail Sales (on fire of late and still expected to impress), housing data (also on fire), and Federal Reserve speak (expected to still be market friendly). 

Speaking of fire, Bitcoin keeps pushing to new highs, hitting over $60k over the weekend.  The volatility still isn’t sensible, but genuine interest and demand seems to continue picking up from “smart money” investors. This isn’t just a small investor thing.  As mentioned before, I’m optimistic that we’ll see a regulated mutual fund or ETF introduced here in the U.S. this year, especially since Canada has already launched a few and they’re raising assets. 

In a year already filled with various topics that books will be written on, including meme stocks, cryptocurrencies, and SPACs, we can now also add NFTs.  A few questions have come my way on the topic of NFTs (non-fungible tokens), and I’ll admit I’m still learning why they might be more than just the same concept of trading baseball cards.   For a short explanation, here’s a 90-second video. For a longer form article, this has been recommended.

What’s my view?  Like the aforementioned investments, as a professional allocator I’m intrigued about the possibility of new asset classes and the opportunities for more tools to manage overall portfolio risk, but I’m also wary due to high volatility, lack of history, and a deep concern for the potential of poor investor behavior. Best course of action in my opinion is to limit exposure to low single digit allocations at most for long-term investment portfolios. 

The Real March Madness

It’s that time of year to pick your brackets for NCAA basketball. In men’s basketball, here in Big 10 country, we’re proud to note that the Big 10 had 2 of the top 4 seeds, and 4 of the top 8 (Illinois looks great).  The Big 10 might be as dominant in men’s college basketball as they are in women’s college volleyball.  This all said, the Big 12 sure put a lot of seeded teams into the tournament as well, led by the Baylor Bears.

Have a great week! For more insights and commentary, visit our Financial Advisor Success Hub.

 

0831-OPS-3/15/2021

The CFA is a globally respected, graduate-level investment credential established in 1962 and awarded by CFA Institute — the largest global association of investment professionals. To learn more about the CFA charter, visit www.cfainstitute.org.

The CMT Program demonstrates mastery of a core body of knowledge of investment risk in portfolio management. The Chartered Market Technician® (CMT) designation marks the highest education within the discipline and is the preeminent designation for practitioners of technical analysis worldwide. To learn more about the CMT, visit https://cmtassociation.org/.

 

About Rusty Vanneman
Rusty Vanneman, CFA, CMT, serves as Chief Investment Strategist of Orion Portfolio Solutions. He has been with Orion since 2012, previously serving as President and Chief Investment Officer of CLS Investments. Prior to joining the Orion organization, Mr. Vanneman served as Chief Investment Officer and Managing Director for an RIA in the greater Boston area. His 11-year tenure at the RIA included a five-year span during which the firm was owned by E*TRADE Financial, where he also served as Senior Market Strategist for E*TRADE Capital. He also served as a Senior Analyst at Fidelity Management and Research in Boston. Mr. Vanneman received a Bachelor of Science degree in Management from Babson College, where he graduated with high distinction. He is a CFA charterholder and member of the CFA Institute. He also holds the Chartered Market Technician® (CMT) designation and is a member of the CMT Association.