– February 2021
We hope that this finds you and your families well and coping with the winter of Covid. What a year to have been through. At the time of this writing it’s been about 11 months that we, at Atlas, have been largely out of the physical office, working mainly from home. In that time so much has transpired with markets, politics, social issues, and personal challenges. But… as we look ahead, we are hopeful that life will become less restless and we are optimistic for a future beyond the pandemic.
In the last year, the business community as a whole has learned that we can effectively stay connected and maintain productivity through technology, even when not physically together. We’ve been able to provide and maintain communications such as these periodic emails, our quarterly newsletters, and web-based meetings which have helped to keep our valued clients up-to-date on our approach and their own portfolios. As we continue navigating this climate, we look forward to bringing you these types of communications and aim to answer the questions of the day. The positive feedback we’ve received from many of our clients makes us confident that these efforts are making a difference, and helping them to rest more easily, even in tumultuous times.
As I sit here today on the 11th of February, the S&P 500 stands at 3909, a record high for the index. In fact, the index is up over 70% from its low last March 23, 2020. Likewise, the Russell 2000 Small Cap Index recently set its all-time high at 2299, up over 127% in the same period! Now, these date ranges are very specific to the effect of the pandemic. March 23 represented the absolute low point for the major stock market indices. From February 20, 2020 to that March 23rd date, the S&P fell nearly 40%. But, the short-term volatility of those indices points out the importance to maintaining focus on the horizon and not getting caught up in the headlines of the day. Understandably, many investors were very concerned during that time, and unfortunately, some individuals reacted to the headlines and chose to exit the markets with the hope of avoiding further losses. In effect, they made a choice that prevented them from participating in the recovery.
I am asked often about why the markets seem to be doing well in a time when the economy seems so bad. “So many things are shut down” they say. I think this is due to a behavioral factor that many individual investors exhibit. Many harbor the desire to congregate and enjoy time together. Unfortunately, given the pandemic, those things have been greatly restricted. Furthermore, the things we enjoy doing, such as dining out, attending concerts and sporting events, etc. have been curtailed. In reality, the entire travel, leisure, and entertainment sector of the economy has nearly been shut down. For many of us, that’s the part of the economy we notice the most. So, it can understandably lead us to the conclusion that the entire economy is suffering similarly. In actuality, this isn’t quite the case.
It’s true that we experienced a deep recession in 2020. As Covid took hold in late February and March, the economy shrunk. It was down 5% in the first calendar quarter of 2020, and a record 31.4% in the second. This represented the most sudden and deepest recession since the Great Depression. But, as mentioned above, this was an event-driven recession rather than a cyclical one. As such, it allowed the potential for somewhat more clarity as to the potential and timing of rebound. Accordingly, insightful investors began to consider and shift their focus from the immediate challenges, toward the opportunity represented by the coming recovery.
As bad as it had been in early 2020, the third quarter saw a rebound, with GDP actually growing 33.4%, and another 4% in the fourth quarter. At this time, the expectation is for economic growth to continue in 2021 and through 2022. Estimates range anywhere from 3.0% to 6.7% in 2021, and average about 4.24% for 2022. In addition, the Institute for Supply Management’s recent reports show rather strong current activity in both the Manufacturing and Service sectors. While this information seems counter to our experience, we are in better economic shape now than we were last spring. So, my answer to the question above is that in fact, the economy isn’t quite as bad as we may think. It is showing signs of sustainable growth, and that the end of the pandemic is in sight. Both of these things are very positive for the growth of corporate earnings, and asset prices are reflecting that fact.
We at Atlas have been advising our clients to maintain their original risk-based asset allocation throughout this economic event, and continue to do so. This strategy has worked well through this and many other bouts of negative volatility. Of course, there are adjustments that are made in these times. We continue to watch market and economic conditions to make prudent adjustments to our clients’ portfolios to position them for the future.
Please feel free to contact your Atlas Wealth Management Advisor if you have any questions about this or any other financial matter. As always, we appreciate the relationship we have developed and look forward to hearing from you.