Atlas Viewpoints and Market Review – June 2021

As we near the end of the first half of 2021, we’re seeing a market develop that’s very different than the one we left behind before the pandemic hit. Through the summer of last year, clarity about what was to come was very hard to come by. To be sure, the sudden sell-off of March changed the investment landscape, and we would suggest that few investment strategists foresaw as strong a rebound in the markets as we experienced last year. But, as with any correction or sell-off, the conventional wisdom was again confirmed, that individual investors are wise to maintain their suitable risk-based asset allocation, and ride through volatility. Those that did have largely come out of the situation in fine shape.

So, thus far in 2021, we’ve seen a continuation of the market recovery, albeit with leadership in the markets transformed. As of early June, the S&P 500 is up about 13% on a year-to-date basis. But, contrary to last year when the Technology and Consumer Discretionary sectors set the pace, 2021 is witnessing Energy, Financials and Industrials leading the way. In addition, the value style of investing has taken over the growth style, which had been outperforming for quite a few years.

Also of interest has been the run-up in small and mid-cap stocks. That rally, which began last fall, continued into the first quarter of this year. While experiencing heightened volatility since early March, the Russell 2000 index currently stands up around 18% for the year.

The international space has been somewhat more mixed, but no less transformed. Thus far in 2021, developed Europe has been exhibiting relative strength. The Euro Stoxx 50 is around 17% as of this writing. Few investors were keenly interested in Europe as an investment opportunity over the last few years, but attractive values were being created, and overall those markets seem to be making a comeback. The broader EAFE Index is trailing Europe, year-to-date, as are China and the emerging markets.  

In the fixed income arena, the Barclays’ Aggregate Bond Market Index is down on both a year-to-date basis and over the last 12 months. This is largely due to the rise in Treasury rates we’ve seen as economic growth projections and inflation fears drove rates higher earlier this year. There have been opportunities however, as seen in the high yield market as credit risk spreads have come down, helping the valuations of those sub-prime bonds. In addition, after rates hit their recent peak in March, opportunities to extend maturities to take advantage of higher intermediate rates were accessible. We at Atlas, took some advantage (where possible) of that and have extended our portfolio durations somewhat.

Having seen markets rebound so well over the last year, insightful investors will refocus their work on looking toward the future. We at Atlas are no different.

We expect the economy to continue to expand throughout 2021 and 2022. This year we have seen corporate earnings coming in well above analysts’ consensus expectations, which could lend support for equity prices. That said however, some of those expected profits have already been reflected in the current market, and expectations for the future remain high. This could be a near-term risk factor for stocks.  In addition, the looming prospect of inflation could produce a headwind to both stock and bond prices.

As a result, we wouldn’t be too surprised to see heightened volatility come into the markets this summer. But as investors and not speculators, we keep our eyes focused on the 18-month (and longer) horizon. We believe that any period of volatility in the markets could present an attractive entry point for those with excess cash, or opportunity for fully allocated investors to tend their gardens. The current economic and business fundamentals indicate to us that companies may be able to enjoy an extended period of profit growth potential through 2022 and beyond.

If there is one thing that the past year has [again] taught us, it is that the economy is not the market, and the market is not the economy. It has also taught us that maintaining a proper risk-based allocation, and not allowing market, economic events or current headlines to change that allocation is the prudent approach to market volatility. We value the lessons learned from the past, and encourage our clients to exercise the prudence and wisdom of those lessons.

With summer here, it is a time to plant. It’s been said that growth spurts and uneven growth are a natural part of life… in the garden and in us. We would add that they are also a natural part of investing and the markets. We recognize that markets sometimes move unpredictably, and corrections do occur. These events are often just preparing the ground for future growth. Our goal, in part, is to lessen the chasm between the highs and lows toward greater balance.

Of course, if you would like to discuss the above, or have any other questions, feel free to contact your Atlas Wealth Management Advisor.