Covid is far from gone, but the U.S. economy and the capital markets are feeling out what a world with the virus largely contained may look like.
In the U.S., vaccine rollouts are generally ahead of expectations while another surge has led to additional shutdowns in Europe and truly devastating situations in India, Brazil, and some other emerging-market countries.
In February President Joe Biden signed a $1.9 trillion stimulus package, adding fuel to an accelerating economy. This was followed by the announcement of support for another program to spend an additional $2.25 trillion on infrastructure and clean energy initiatives.
Against this backdrop, global stocks continue to charge higher, with the U.S. once again outperforming international markets. The trendiest stocks from the “stay at home” theme lagged significantly over Q4 and Q1, but more recently we’ve experienced a balance with the market favoring tech darlings one day and small caps and “real world” stocks the next.
Speculative fervor among day trading retail investors remains heightened but has moderated from a peak in Q1 after many investors suffered losses in meme stocks and SPACs. Many companies featuring high valuations but relatively little sales or earnings remain perilous, in our view.
Some of the realities of how the stimulus packages will be paid for in the form of higher taxes is coming into view. Potential plans to increase corporate taxes, capital gains for those with incomes greater than one million dollars, and much heavier estate taxes are being evaluated by investors. Most seem to be waiting for actual legislation before acting.
Bond yields have stabilized in the second quarter, at least temporarily, as investors are struggling to determine if stimulus and pent-up demand will lead to inflation. Long-dated U.S. Treasuries remain at significant losses for the year.
Personal Capital Managed Portfolios: Our more diversified approach to U.S. equities continues to lead concentrated, tech-heavy capitalization weighted indexes in 2021, even as small cap stocks have relinquished their advantage. A modestly lower duration in the bond portfolio has been beneficial so far in 2021, as has exposure to inflation-protected securities and high yield corporate bonds.