May 2021
Market Update

Welcome to May!  Hard to believe we’re rolling into summer when the last year feels like it took a decade.  This time a year ago we were giddy about the possibility of re-opening parts of the economy and getting back to normal.  We’re still working on that “normal” thing, but it would be fair to say that things are moving in the right direction from where we were last spring.  Not withstanding the personal toll the Pandemic has taken, it is fair to say that the economic outcome could actually have gone much worse than it did.

Recessions tend to have a pattern.  First you have a big unexpected and negative event.  Pandemic, check.  Then you have consumer confidence deteriorate and markets react negatively.  Fastest bear market decline of 34% in three weeks, check.  Unemployment numbers skyrocket and companies struggle to stay in business.  Longest first time claims for unemployment ever, check.  Then we see government intervention to help shore up confidence.  Over $5 Trillion and counting, big check.  Then goods and services get cheaper as businesses lure consumers back to buying.  Hmmm.  Maybe not so fast on that one.  Anyone been trying to buy a house lately?  (or a car, or lumber, or appliances, or … )

How did we get here?

• Home builders were shy after the 2008 Financial Recession and have under-built single family homes compared to historical averages.

• Millennials are now forming households and deciding that luxury apartments really aren’t that much fun when that’s where you sleep … and go to work … and teach your kids.

• Credit scores and bankruptcies have healed from those impacted by the Great Recession and with interest rates low, they too are wading back into home ownership

• Investors aren’t selling what they bought in 2008 (for the most part) because there is simply no other place to go to derive income right now, so low interest rates are attracting buyers and detracting potential sellers

• Let’s not forget about the moratorium imposed on evictions for those unable to pay their rent – or their mortgage – due to the Pandemic; for the most part those restrictions are still in place, leaving stagnant properties unavailable to be sold or rented.

And then let’s throw in the issues with the supply chain disruptions created by the Pandemic.   We shut down the global economy.  We stopped making a lot of stuff, we stopped shipping a lot of stuff, and now everyone wants more stuff to make up for the stuff they didn’t get to buy when we were shut down.  More demand than supply and we have higher prices.

Is this temporary, or could this endure for awhile and why is it important?  Well, it is likely the supply chain disruptions will sort themselves out within the year, but houses don’t just spring up from the earth overnight.  Those gun-shy builders will have to find land, buy land, get permits, put in infrastructure and utilities and that’s all before they sell the first lot.  Existing home sellers aren’t anxious to jump into the fray because many of them refinanced a few years back to those nice low interest rates on 15-year mortgages and, well, where are they going to move to?!  So the housing supply may take some time to come in line with demand, especially as households are actually in a better position now to buy a home than they were a year ago as the individual savings rates climbed to multi-decade highs (couldn’t go out and buy stuff!).  See our graphic of the month HERE for affordability by state.

This is important because housing and all its ancillary economic components (buying/renting/building/servicing) account for over 17% of annual GDP and construction accounts for more than 7 million jobs.  When our housing market is healthy so is our economy – and so is our stock market.

Indeed, markets have continued their push higher from last year with the S&P gathering returns just over 12% as we started into May.  Corporate earnings season has been stellar and in the US, as the vaccination percentages have been climbing and the fear of contagion subsiding, local economies are reopening and it seems that everyone is anxious get out and enjoy their savings.  Internationally, we have not seen as strong a recovery as their vaccination rates have struggled – and India is a humanitarian disaster right now – so global markets are a bit behind us today.

In your portfolios here, we remain fully invested in stocks with a more balanced allocation between growth companies and value companies than we had a year ago.  In the wake of continued economic growth, small company stocks have enjoyed good gains and even oil has made a recovery as we are back on the road and in the air.  Bonds waffled a bit in the first quarter as we saw a sharp spike in the 10-year treasury rate (which is what sets those mortgage rates so pretty important right now) – but that settled into a narrow range for the moment and mortgage rates are near their lows once again. 

David has many sayings, and I will borrow another one here:  High prices are the cure for high prices.  Simply put, when everything is expensive, be it houses or stocks, higher prices will eventually put the lid on more buying, so we would not be surprised to see a small pullback here as this market takes a breather.  That being said, the table has been set for continued economic growth and we will be here to trade the market it gives us.

As always, we welcome your questions and concerns and hope you remember to join us for our quarterly Zoominar where we take on the Inflation Question!  If you have not yet registered, please follow this link to get signed up for the live show at 11 am Arizona time, 12 pm Utah time:  LINK.  As always, we will provide the recording online in the day or two following the presentation in the event you are unable to attend.

Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.

If you have questions, please contact us.

FINANCIAL PLANNING
COLLEGE AND TAX PLANNING
401(K) ALLOCATION
GRAPHIC OF THE MONTH

To download the May 2021 Newsletter: CLICK HERE