Economic Outlook – March 2021

Economic Outlook - March 2021

The Federal Reserve remains a central figure in the investment markets, using monetary policy to keep short-term interest rates low while continuing to purchase bonds in the open market. Congress is also playing a role in the markets through its stimulus packages, which are formally known as fiscal policy. Combining monetary policy and fiscal policy, the market appears to feel it has full support from the federal government. Before we get the idea that this will always be the case, we should remember that it is the prospect of inflation that keeps programs like these from becoming excessive. If inflation creeps into the equation, the markets and investor portfolio allocations will need to stand on their own. For this reason, we take this opportunity to remind everyone to remain within an acceptable risk tolerance in your portfolio allocations.

As interest rates have been rising this year, investors have seen the market value of their fixed-income portfolio allocations decline. As reflected in the shorter-duration posture of our bond portfolios, we have been preparing for a scenario of rising rates. Compared to longer-duration allocations, shorter-duration allocations are less sensitive to interest rate increases. Unfortunately, they do not completely eliminate the decline in market value during periods of rising interest rates. We feel our current duration posture strikes a good balance between the ability to generate income and the need to navigate the volatility present in the bond market.

Before you let low interest rates and price pressure on bond allocations influence your decision to put more money in the stock market, consider that we are only two months into the year. The S&P 500 was up as much as 3.4% in January, but closed the month at a loss of 0.5%. In February, the S&P 500 was up as high as 5.8% at mid-month, drifted lower after that, and has traded intraday with a price range fluctuating between 1% and 2.5% over the last five days. It is best that investors take a long-term perspective – and normal to ignore most short-term market fluctuations – but in doing so, they may not have noticed some market developments. The stock market has seen some rotation toward small and mid-cap value and growth sectors, with popular large cap indexes lagging. Stock strategies with high-dividend targets have also been popular so far this year. We found ourselves fortunate in this situation, as our stock allocation favors a higher allocation to small and mid-cap stocks compared to the S&P 500.

Where To from Here?

It would not surprise us to see continued upward pressure on mid- and longer-term interest rates through early to mid summer. After that, we see rates stabilizing or even drifting back lower. This suggests that declining fixed income market values may be temporary. Stock market valuations are elevated, and monetary and fiscal policies aimed at supporting consumers and the economy are expected to provide support for the stock market as well. Still, we don’t expect returns to be as generous as last year. As the last two months have already demonstrated, we expect some ups and downs. Investors may tend to seek some sort of alternative investment to escape excessive valuations in the stock and bond market, but we find alternatives to be in the same boat.

We continue to monitor market and economic conditions, along with our capital market metrics, to provide the best blend of market exposure, income, risk and performance. Thank you for your business and confidence in Bell.

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