Stock Talk: Looking Back, Looking Forward

James McFarland, Senior Portfolio Manager for Oak Harvest Financial Group, wealth management and financial advisor in Houston, Texas, takes a look back at the first Quarter of 2021, what happened in the markets, and what it could mean for the rest of the year.

James McFarland: Hey, everyone. This is James McFarland, Senior Portfolio Manager here at Oak Harvest Financial Group in Houston, Texas. It’s been a long time since you’ve heard from me, but I’m happy to be back with you, and to welcome you to the April 16th episode of Stock Talk: Keeping you connected to your money.

In today’s episode, we’re going to take a look back at the first quarter of 2021, what did well, what didn’t, what were the drivers, and what does it mean for the rest of the year. We’ll touch on the answers to these questions as we go along.

Now as you probably know by now, we’ve been and remained bullish on the stock market for 2021. Looking back in history, we see several strong similarities between our current market environment and in those of 2013 and 2017, in particular. Both were post-election years and both produced strong returns for investors, about 38%, in fact, measured from election day to the market peak the following year.

The S&P is currently up about 10% in 2021, and we do think there is plenty of room left to run. Talking about 2021, it’s now April. We’ve just entered the second quarter of the year, so that does make it a good time to just take a look back and see what has happened throughout the first quarter of the year.

Q1, despite being relatively choppy, was loaded with upside economic catalysts. Businesses are reopening, COVID death and hospitalizations are trending lower as people now have the option to get vaccinated against the coronavirus, with nearly 100 million Americans receiving at least one dose of one of the available vaccines. We’ve started to see recoveries in some of the most badly hurt industries like restaurants, hotels, and airlines. With Delta, even stating that bookings beyond 60 days are now almost back to 2019 levels.

This is all very positive. Despite the seemingly non-stop panicky headlines from the financial media and all media for that matter, the United States could actually be poised to enter one of the strongest economies since the early 1980s. According to BCA Research, fiscal stimulus and the restricted spending environment throughout 2020 during the pandemic have produced an excess of $1.9 trillion on consumer balance sheets, $1.9 trillion in extra cash in the hands of consumers.

Other estimates put that figure at closer to something like $3 trillion or more. Regardless, it’s a tremendous amount of extra money in the hands of consumers. Some of that money will be saved, some will go to pay down debt, and some of it is going to be invested, but a lot of it is going to be spent. There’s a lot of pent-up demand that is just starting to be unleashed as again we’re starting to see in consumer discretionary spending

The Federal Reserve for their part has kept interest rates low and restated their opinion that they had no intention of reducing or slowing the Fed’s stimulus-based pace of monthly asset purchases. The Fed has consistently conveyed that they will remain in a very supportive mode for the market for at least another couple of years or so.

Now, in addition to the stimulus, we have seen inflation tick upwards, as well as a rise in long-term interest rates. We will likely see inflation again in the future. As we have stated before, we do believe the inflation component of yields has largely peaked in the short term, along with oil, copper, lumber, and other commodities that tend to lead inflation readings. For the rest of this year, we think real growth as a component of yields is going to be the more important driver of investor returns.

On the investor front, investor sentiment has also grown increasingly positive throughout the quarter, and you could now make an argument that it borders on euphoria. This can actually be something of a contrarian indicator. Investors always face a struggle between greed and fear, and when sentiment becomes euphoric, it can mean that greed has gotten too strong and that a pullback or correction in the market could very well be do.

This is actually in line with our expectation for the year as we think that there’s going to be at least one more pull back and a bit of chop this year, perhaps late in the second quarter, June or so. We’ll continue to monitor this as time goes on, and as usual, when we are presented with opportunities to buy our portfolio companies at cheaper prices, we will take them.

Now, let’s look at some asset returns as of the end of the quarter on March 31st. The S&P closed the quarter up about 6%, the Dow up 7.5%, small-cap stocks were up 13%, and the Nasdaq was up just about 1.5%. The leaders in Q1 were small caps, while the previous market leaders, large-cap tech stocks, took a back seat. The relative lag by large-cap tech stocks is something we expect to reverse again in the second half of the year as investors reevaluate earnings expectations and valuations.

Over on the fixed income side of things, bonds were generally down across the board as yields did rise with longer-term government bonds falling by about 13%, investment-grade bonds by about 3%, and short-term US Treasuries essentially flat. There is, of course, an inverse relationship between bond prices and yields. When yields rise, bond prices fall. A question sometimes comes up when this kind of thing happens. Do bonds still have a place in portfolios? The answer is yes, they do.

Fixed income plays a key role in providing stable income and reducing portfolio risk volatility. Stocks have certainly historically outperformed bonds, but stocks are really only appropriate investments for risk capital, capital that can withstand stock market volatility when it does arrive, and it most assuredly will. The exact investment strategy, the right mix of stocks, bonds, real estate, and other assets depends on your specific risks, capacity, objectives, and timeline, your situation. That, of course, is what our advisors make it a point to understand so that when it’s time to build your investment strategy, it’s built the right way for you.

Going back over to the stock side of things and taking a look at sectors, all 11 sectors of the S&P 500 were up for the quarter, with energy, materials, and industrials leading; and information technology, communication services, and utilities, the laggards. This echoes the general leadership shown in the quarter by value and economically sensitive stocks as opposed to secular growth stocks, which we’ve talked about in the past.

In an early bull market, leaders and laggards often shift around as the fundamental backdrop for stocks slowly adjust to a different economy. For the second half of the year, we again do see potential in areas that lagged in the first quarter, particularly technology and communication services. We, of course, as always, maintained diversified portfolios for all of our clients. We aren’t interested in chasing after sectors or individual stocks on a quarter-by-quarter basis. We are interested in the long term.

When we’re building our portfolios and investment strategies, they’re based on long-term risk-reward expectations, volatility, and developing a strong blend of dividend payers, dividend growers, and growth stocks across all industries and sectors. The exact makeup of the portfolio does shift, and I expect to be both adding and removing names from our portfolio in line with our larger bullish view.

To sum up the first quarter of 2021, a bit on the choppy side, but still very positive, and we remain bullish on the rest of the year as well. We will be continuing to discuss our official second-half outlook over the coming weeks in both our written weekly market updates and on this very podcast. Keep an eye out for that, and keep listening as well.

With that, we come to the end of today’s episode of Stock Talk. Thank you very much for joining me as we look back on the first quarter and also look ahead to the rest of the year.

If you enjoy the show today, please share it around. As always, I encourage you to stay safe, stay positive, and remember your investment and financial plan. If you have any questions or would like to find out if we can help you with your portfolio, give us a call. Our number is 281-822-1350.

Once again, this has been James McFarland. This has been Stock Talk. Have a wonderful weekend, and I’ll talk to you again soon.

Voice-over: All content contained within Oak Harvest podcasts expresses the views of the speaker and is for informational purposes only. It is based on information believed to be when created, but any cited data, indicators, statistics, or other sources are not guaranteed. The views and opinions expressed herein may change without notice.

Strategies and ideas discussed may not be right for you, and nothing in this podcast should be considered as personalized investment, tax or legal advice, or an offer or solicitation to buy or sell securities. Indexes such as the S&P 500 are not available for direct investment, and your investment results may differ when compared to an index. Specific portfolio actions or strategies discussed will not apply to all client portfolios. Investing involves the risk of loss, and past performance is not indicative of future results.