Over the next few months, the production and distribution of COVID-19 vaccinations is expected to ramp up significantly. Late in February, the FDA approved Johnson & Johnson’s single-shot COVID-19 vaccine for emergency use. The President recently announced that he projects there will be enough doses of the coronavirus vaccine available for the entire adult population in the U.S. by the end of May. Based on these positive developments, investors rewarded stocks in February with solid gains, demonstrating optimism regarding economic recovery and falling COVID-19 infections. With spring and warmer months ahead, the opportunity to spend more time outdoors will not only be refreshing, but it will also provide businesses the opportunity to reopen and begin to recover from the pandemic.
With most Standard & Poor’s 500 (S&P 500) companies reporting fourth quarter financial results, we are seeing Corporate America heal and show signs of recovery. With that said, there are significant divergences in segments of the economy performing well and those yet to see improvement. While S&P 500 corporate profits gained only 1.8% in the fourth quarter, these results are 14.7% above expectations. This is the third consecutive quarter of the highest level of earnings surprises we have witnessed in the past twenty years. In addition, while economists expect a robust recovery in GDP for 2021, approaching a level not seen since 1984, S&P 500 corporate profits are expected to surge over 24% this year! This expected robust recovery has contributed to some of the highest market valuations not seen since 2000. In addition, improving economic conditions are contributing to rising interest rates and inflation. While this is not necessarily a bad thing, the pace of the recent rise in interest rates is concerning to some investors.
You can look no further than the bond market to find the downside to rising interest rates. Bond prices move inversely with interest rates. When interest rates fall, bond prices rise. When interest rates rise, bond prices fall. Interest rates have increased in 2021 and bond prices have declined, leading to moderate losses in the bond market. While this is normal in an improving economy, it may be unsettling for bond investors seeking a safe haven for a portion of their assets from the vagaries of stock market volatility. However, attempting to predict interest rates has been an exercise in futility over the past decade, as interest rates plunged to all-time lows. We believe it remains prudent to maintain some diversified bond exposure in portfolios to mitigate stock market risk. Therefore, we focus on structuring high quality bond portfolios with below average maturities to dampen the negative effects of stock market declines.
We see the direction of the financial markets increasingly dependent on interest rates, economic data, and future corporate earnings. We continue to see evidence of strong economic recovery in the second half of 2021 and into 2022. However, the global pandemic continues, with new variants of the virus spreading. This may contribute to unexpected surges in cases from time to time and renewed economic restrictions. Therefore, pullbacks in the stock market are normal and should be expected as the pandemic persists and global economies recover. We view these pullbacks in the stock market as opportunities to make portfolio adjustments within a long-term investment time horizon.
The one-year anniversary of the novel coronavirus (COVID-19) outbreak being declared a global pandemic is March 11th. We extend our most heartfelt sympathies to our friends and families who have lost a loved one during this difficult year. As we strive to provide our best financial and investment advice to you during these unprecedented times, we humbly reflect on the challenges faced by many of you and appreciate your trust and loyalty. We wish you and your family health and wellness in the coming spring season. As always, please feel free to contact us at 513.791.9258 (Blue Ash) or 513.863.4015 (Hamilton) or inquire about arranging a video call!