VF View – 1st Quarter 2021
What a difference a year makes! Unlike the situation in the first quarter of 2020, U.S. stocks posted healthy gains since the start of the year, and there is optimism that the recent flurry of government checks to individual consumers, plus the huge infrastructure project on the drawing board, will give the economy a shot in the arm. Other countries are looking at the U.S. bull market with envy, and the American economy seems to have weathered its biggest challenge since at least 2008.
Just about every investment saw gains in the first quarter. The widely quoted S&P 500 index (largest 500 US companies) gained 6.2% so far this year. Moving down in size, the Russell 2000 Small-Cap Index was up 12.7% in the first three months.
In major change of direction, technology-heavy Nasdaq Composite Index is up 2.78% for the year, as tech stocks finally took a back seat to their peers in other economic sectors.
International investors saw far more modest gains. The broad-based EAFE index of companies in developed foreign economies gained 2.8% in the first quarter.
So, does this mean we want to be out of internationals? Absolutely NOT! Based on historical valuations, international companies are a much better deal than their US counterparts. As the graph below shows, We are now in a 13 year run (nearly double what we have witnessed in recent history) of US equities outperforming the stocks abroad.
This is obviously a big change from this time last year, when stock markets in the U.S. and abroad were reeling from a historically rapid downturn. Today, most analysts believe that the market is overvalued and many professional investors are cautious. But any move to get out of the markets when this overvaluation became evident would have meant missing huge gains in the markets, proving once again the folly of trying to time the market. And we are looking at a multi-trillion dollar infrastructure proposal which would inject additional life into the U.S. economy.
Better news: analysts have increased their earnings estimates for S&P 500 companies by 6.0%—which is a record—and unemployment rates have been trending lower since the start of the year. Finally, the progress of vaccination against COVID appears to be picking up, with some estimating that all adult Americans will be vaccinated in the next couple of months. A return to normalcy could be viewed as another positive sign.
All of this is a long-winded way of saying that it is impossible to predict whether the markets will continue the long bullish run or take a break. It is not impossible that stocks will eventually return to more normal valuations—suggesting prices at least 30% lower than they are today—but that could happen gradually, as companies boost their earnings while market returns go back down to single digits. The sudden, unpredicted appearance of the pandemic shows us how little we know about what is to come. But I will leave you with one final graphic. Keep your eyes on long-term performance and not on the short-term noise. Doesn’t 2008 just look like a little dip now?
Nasdaq index data:
International indices: https://www.msci.com/end-of-day-data-search