period ending March 31, 2021
“Time in the market beats timing the market.” – investing adage
What Happened in the First Quarter?
The US stock market continued to climb, reaching new highs, while the MSCI index (an index of international stocks) reached levels not seen since before the Great Recession of 2008. GreenUp believes these increases were driven by four tailwinds:
- The US Government continued to spend money.
- Interest rates remained near historic lows.
- As COVID-19 vaccines rolled out, the pandemic showed signs of slowing in the US from its peak during the winter holiday season.
- An anticipated end of the global pandemic led to optimism and positive investor sentiment.
How GreenUp’s Dynamic Investment Models Are Positioned
Because of these continuing tailwinds GreenUp is running the dynamic investment models at 106 to 108 percent of their benchmark risk. GreenUp’s rationale is based on an expectation that stocks will continue to outperform bonds.
In GreenUp’s dynamic models we are using actively managed funds, relying on stock and bond pickers in value stocks, bonds, and the Chinese market. These are asset classes that we believe skilled active managers may outperform in the current environment.
GreenUp’s Forecast
As we emerge from what appears to be the recovery phase of the economic cycle, GreenUp anticipates the market being more discerning towards risk. During the pandemic, most companies provided either negative earnings forecasts or gave no forecasts at all. In the second half of 2020, stock prices were driven forward by government spending and low borrowing rates.
In the future GreenUp thinks companies will have to prove their worth by increasing profits. Company fundamentals will start to play a role in their valuations as they face potentially lower government stimulus, higher interest rates, and competition. Companies will have to continually improve earnings for their stock prices to continue to rise, which will likely be more challenging as time goes on.
A potential increase in corporate income taxes could be another headwind for stocks, however this may be six to 18 months from now and GreenUp does not believe we should worry about taxes just yet. The possible risk at this point in time is that the market will not latch onto the continuing recovery in economy.
Lessons Learned
During the onset of the COVID-19 pandemic the market dropped at a historic rate. Though this was not the worst downturn in stocks; it was the most rapid decline ever in the US market. The correction following March 2020 was one of the quickest recoveries in history as well. The market also saw growth investments outperform value investments for most of 2020, only to see a significant outperformance of value over growth at the end of the year. Algorithmic (computer program) trading is a likely culprit contributing to this extreme volatility.
These rapid changes underscore the importance of a buy-and-hold investment philosophy, staying true to a long-term investment strategy and avoiding market timing. GreenUp continues to be cautious about switching between investment sectors and styles because trading algorithms create an environment where changes happen quickly.
Do you have more questions about your investments? Reach out to your GreenUp Wealth Advisor to dive deeper.
GreenUp Wealth Management is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
