Welcome to the April 2021 Newsletter. This month, we’re discussing the economy, COVID-19 vaccine updates, and other news.
We continue to watch inflation trends in an economy that has seen $2.8 trillion in fiscal stimulus since late December. We’re aware stock market valuation levels are high and the level of market speculation has increased in recent months. We continue to closely monitor inflation and interest rates given their relationship to stock market valuations. For now, we are maintaining our fully invested position in all portfolios while remaining vigilant.
We stated last month, “considerable volatility and short-term pullbacks are inevitable given the high valuation levels of the stock market.” This remains true today. We encourage investors to maintain patience and courage during these times. We expect the stock market to perform above average for 2021.
Employees should continue to make their weekly, biweekly, or monthly contributions to their employer’s retirement plan and personal and spousal IRAs. At this time, additional money can be added to an investor’s stock market allocation, but only on a dollar-cost-average basis spread over 12 months. All portfolios should remain fully invested.
Quote of the Day
“The inherent vice of Capitalism is the unequal sharing of blessings. The inherent virtue of Socialism is the equal sharing of miseries.” – Winston Churchill, 22 October 1945
U.S. nonfarm payroll employment increased in February by 379,000, and the unemployment rate dropped to 6.2%. Most of the job gains were in leisure and hospitality with smaller gains in health care, social assistance, retail, and manufacturing.
The seasonally adjusted, all-encompassing unemployment rate, U-6, was unchanged in February at 11.1%. There are 9.5 million more people unemployed now than in February 2020.
During the March FOMC meeting, members provided their economic estimates going forward. For 2021 unemployment, members predicted the low point would reach 4.2% to 4.7%. In 2022, they said unemployment had the potential to reach 3.6% to 4.0%.
The December payroll number was lowered by 79,000 to -306,000. The January payroll number was revised up by 117,000 to 166,000. The rolling three-month payroll average increased to 80,000 this month from 29,000 last month.
Gross Domestic Product (GDP)
The Bureau of Economic Analysis said the third estimate of the 2020 fourth-quarter GDP increased by 4.3%.
The increase in fourth-quarter “real” GDP reflected an increase in exports, nonresidential fixed investment, personal consumption expenditures, residential fixed investment, and private inventory. This final number of GDP up +4.3% is 0.2% higher than the estimate last month. For the year 2020, GPD was down 3.5% compared to 2019.
Brian Moynihan, Bank of America CEO, said on Bloomberg TV in March, “We expect the U.S. GDP to be 6.5% in 2021 and 5.5% in 2022.” In March, the FOMC predicted GDP would reach 5.8% to 6.6% in 2021. We hope these high economic growth expectations come true and we get millions of people back to work.
Annual inflation increased to 1.6% in February as measured by the Personal Consumption Expenditures (PCE) index. The core PCE index, which excludes food and energy, decreased in February to 1.4% from 1.5% in January.
The FOMC predicted in March the PCE index would reach 2.2% to 2.4% in 2021 and 1.8% to 2.1% in 2022. Core PCE, which excludes food and energy, should be 2.0% to 2.3% in 2021.
Long-term inflation expectations can be determined by measuring the differences between Treasury bond yields & TIPS real yields of the same maturities. Results are:
|Bond Maturities||Annual Inflation Expectations|
This month’s estimated annual inflation numbers above are 0.18% higher on average than last month’s.
2020 Federal Income Tax Filing Deadline Extended
The IRS announced the 2020 deadline for individuals filing their federal income taxes has been extended until May 17, 2021. Filings and tax payments made by May 17 will incur no penalties or interest. Individuals who need more time to file can request a filing extension until October 15, 2021 by filing Form 4868. But this extension does not extend the time to actually pay federal income taxes. To avoid penalties and interest, taxpayers must pay in full their 2020 federal income taxes by May 17, 2021.
We expect Congress to vote on an infrastructure package this year that will also include proposed changes to the tax code. Tax changes will likely include the corporate tax rate going up from 21% to 28%, the maximum individual income tax rate going up from 37% to 39.6%, and the capital gains tax rate going up for higher-income individuals.
On a year-over-year basis, building permits have increased a robust 17%. The median price of a new home has increased 7% over the past year, while the median price of an existing home has increased 16.2% for the year through February 2021.
The Conference Board’s Leading Economic Index (LEI) rose 0.2% in February. This is the 10th consecutive monthly gain for the LEI and indicates continued economic growth even before the $1.9 trillion stimulus or the pending infrastructure bill takes hold. In other words, tighten your seat belt as this economy is preparing to blast off.
Every investor should strive for a highly diversified and low-cost portfolio. Taxable brokerage accounts should additionally be managed to achieve tax efficiency. Always maintain a portfolio that matches the investor’s risk tolerance, needs, objectives, and timeframe. New money can be added to a stock portfolio, but only on a dollar-cost-average basis spread over 12 months.
Stock Market Valuations
Based on our forecast of strong economic growth in 2021 and 2022, we estimate S&P 500 operating earnings will increase from $180 this year to $195 next year. This assumes a moderate increase in the corporate income tax rate in 2022. With a price/earnings ratio of 21 times, the S&P 500 Index has the potential to reach the 4,100s going forward. The market closed Wednesday, March 31 at 3,972.89.
Recommended Action for Your Stock Portfolio
Lately, value stocks have outperformed growth stocks. For an investor who has been overweight in “growth” and wants to buy into the value category, one option is to buy this exchange-traded fund: Schwab’s U.S. Dividend Equity ETF (SCHD).
SCHD has 99% of its assets in the U.S. large-cap value category with 97 different stock holdings. The fund has an expense ratio of 0.06% — very low. Its 5-year average annual performance has been +16.3%, according to Morningstar. Year-to-date as of the March 31 close, its performance has been +14.49%.
For those with money in an employer’s 401K or similar plan, there are limitations as to what you can purchase. For investors with unrestricted brokerage accounts, we continue to like the following sectors: Industrials (VIS), Materials (VAW), Financials (VFH), Consumer Discretionary (VCR), Transportation (IYT), and Housing (ITB). Some areas of technology are also good, especially the semiconductor chip manufacturers (SMH). We applaud old tech companies such as IBM, Cisco Systems, Alphabet, Intel, and Oracle that are doing better than some of the new euphoric tech companies that still have no earnings.
All stock portfolios at Lorenz Financial remain fully invested. A self-directed investor should always seek to ensure their portfolio is highly diversified and low cost.
Below is a summary of vaccine development for four U.S. pharmaceutical companies and one U.K. company.
Pfizer and their German partner, BioNTech SE, have achieved over 95% efficacy with their two-shot vaccine taken three weeks apart on patients ages 16 and up. Pfizer announced they have dosed the first children in their latest COVID vaccine trial of 2,260 adolescents 12 to 15 years old. Early results show 100% efficacy with 18 volunteers who received the placebo getting COVID-19 while no volunteers with the vaccine getting the disease. Researchers acknowledged the subject sample is small, but the results are strong.
Pfizer said they plan to submit this data to the FDA in the coming weeks as a proposed amendment to their emergency use authorization. During the week of March 22, Pfizer started testing their vaccine on 5-to-11-year olds. During the first week of April, they will start testing on ages 2 to 5 and ultimately down to 6-month-old infants. Each lower age group will be tested on smaller and smaller doses. Clinical trials are also underway on pregnant women and nursing mothers.
As of March 31, 76.9 million doses of the Pfizer vaccine have been dispensed within the U.S.
Moderna is testing three one-shot booster options with the National Institute of Health, as a follow-up to their two-shot vaccine. Those booster options are:
- 20 microgram candidates designed against the South African variant (the nastiest variant so far).
- 50 microgram candidates designed against the South African variant.
- 50 microgram candidates that combines the standard Moderna vaccine plus the candidate specifically designed against the South African variant.
The first human doses of the booster candidates were administered on March 10, 2021. If approved, one of these booster doses could be available concurrent with the seasonal flu shot in the fall.
On March 15, 2021, Moderna announced Phase 1 human testing has begun on their next-generation COVID-19 vaccine. This candidate will only require normal refrigeration and will be targeted at developing countries.
On March 16, 2021, Moderna announced they have begun a human Phase 2/3 study for a COVID vaccine for 6,750 pediatric participants in the U.S. and Canada ages 6 months to 12 years. This pediatric vaccine could be 6 months or more away from the company seeking FDA emergency use authorization.
As of March 31, 69.9 million doses of the standard Moderna vaccine have been dispensed within the U.S.
Johnson & Johnson’s vaccine received FDA approval for emergency use authorization on February 26. On March 11, the European Union approved the J&J vaccine for use in the EU countries. Distribution will begin in the 2nd quarter.
The U.S. government has ordered 100 million doses of the J&J vaccine to be delivered by the end of June, and a second 100 million doses have been ordered for delivery in the second half of 2021.
As of March 31, 3.3 million doses of the J&J vaccine have been dispensed within the U.S.
Novavax’s vaccine candidate requires two shots, three weeks apart. No results have yet been published from the U.S. and Mexico Phase 3 trials. On March 11, Novavax reported their UK trial determined an efficacy rate of 96% against the original virus. But in South Africa, where volunteers were exposed to the B.1.351 variant, the efficacy was only 49%. The company is developing a new version of the vaccine that is tailored to that variant.
AstraZeneca’s vaccine has now been reinstated as being safe and effective by the European Health Agency after undergoing a temporary halt in vaccinations in Germany, Italy, France, Spain, and a cascade of other European countries due to a fear of blood clots. The vaccine first faced skepticism over clinical-trial results that suggested it wasn’t as effective as other vaccines on the market. There have also been significant manufacturing delays resulting in European countries receiving only one-third of the expected number of doses. The current issue of potential blood clots seems to be exaggerated by the European press, as only seven cases have been reported in Germany following 1.6 million doses administered. This rate of new blood clots is lower than what normally occurs in a large senior population.
But in the U.S., the AstraZeneca data was called into question one day after the pharmaceutical company announced their vaccine was 79% effective in their Phase 3 U.S. study. On March 23, the National Institute of Allergy and Infectious Diseases it had been informed by the independent data-monitoring board working with AstraZeneca on the U.S. trials that the drug company might have used out-of-date information in its public disclosure of the vaccine’s effectiveness.
The Continent That Can’t Shoot Straight
Source: Page A5, The Wall Street Journal, March 20-21, 2021
The pace of U.S. vaccinations is now 3 million doses a day on average; now 16.4% of the U.S. population has been fully vaccinated, according to data from John Hopkins. By comparison, only 6.4% of Danish, 5.7% of Spanish, 5.2% of Italian, 4.9% of German, 4.0% of French, and 5.8% of U.K. residents are fully vaccinated, according to Johns Hopkins.
Tech Firms Set Standards for Vaccine Verification
In April, a coalition of tech giants and healthcare providers are planning to publish a global standard for mobile apps that can verify whether someone has had a COVID-19 vaccine. There are more than 200 firms involved in this project that include Microsoft, Oracle, Salesforce, and healthcare providers. The project, called The Vaccination Credential Initiative standard, will incorporate digitally verified clinical data with a name and birthdate. Some public places such as offices, restaurants, bars, and entertainment venues will likely require verification that visitors have had the COVID-19 vaccine to enter.
As of March 31, the Daily New Cases chart below shows a dramatic drop in new cases. There is some evidence new cases have started a slight upswing just recently.
Below the Daily Death chart from COVID-19 has had a strong decline since the January 12 peak. Thank goodness! We are now below 1,000 deaths per day due to COVID-19 on the seven-day moving average.
Evergreen Marine: This Month’s Corporate Bad Boy
Source: Page A1, The Wall Street Journal, March 27-28, 2021
One of the largest cargo ships in the world, the M/V Ever Given, ran aground in the Suez Canal blocking all traffic during a severe wind and sandstorm. The incident occurred in early morning Egyptian time on Tuesday, March 23. Finally, on Monday, March 29, the ship was refloated.
This cargo ship, which can carry 20,000 twenty-foot containers, is much longer than the canal is wide. See the diagram below.
As the Suez Canal’s deep channel is only 200 m (656 ft) wide, it’s easy to see how a 400 m (1300 ft) long ship can get both its bow and stern mired in the sand and muck as the ship became sideways.
The high winds blew the ship slightly sideways, and the sandstorm prevented clear visibility. The northbound ship plowed its bow into the eastern bank of the canal under power. Then the stern of the ship swung around and became stuck on the western shore.
It was reported the M/V Ever Given’s underwater protruding bow was buried more than 20 feet into the sidewall of the Suez Canal. A Dutch salvage company unloaded ballast water and fuel from the ship to lighten it. Ten large tugboats pushed and pulled until it was finally refloated on March 29.
Over 13% of trade between Asia and Europe moves on the Suez Canal. During the week of blockage, over 360 ships became backlogged. Half of the ships dropped anchor in the Mediterranean Sea waiting to head south, and the other half were on the south end of the canal in the Red Sea waiting to head north. Reports say it will take four to six days to remove the backlog.
The owner of the M/V Ever Given is the Japanese company Shoei Kisen Kaisha. The vessel is operated by Evergreen Marine in Taiwan and the vessel flies the Panamanian flag. An investigation to identify all the reasons why the ship ran aground is underway.
More data is coming in that validates the 40-year bull market in bonds (1981 to 2021) is over. As interest rates rise, existing bond prices fall. How much a bond mutual fund’s price will fall is dependent on the fund’s average bond duration. The longer the duration in years, the more the fund’s price will decline in percent as interest rates rise. As of March 31, see what has happened to these three bond funds, all with very low credit risk (very low risk of default):
|Bond Fund Name||Symbol||Credit Rating||Average Duration||YTD Performance|
|Vanguard Long-Term Treasury Adm||VLGSX||AAA||18 years||-13.44%|
|Vanguard Intermediate-Term Treasury Adm||VSIGX||AAA||5.37 years||-2.93%|
|Vanguard Short-Term Treasury Adm||VSBSX||AAA||1.99 years||-0.04%|
So yes, an investor can lose money in a bond mutual fund or a bond exchange-traded fund! The longer a bond fund’s duration, the greater the fluctuation in the price of the bond fund when interest rates change. This is called interest rate risk. This is not an indictment of Vanguard bond funds; all bond funds with a comparable duration profile will perform in a similar manner.
The Federal Open Market Committee (FOMC) held a two-day meeting on March 16 and 17. During the meeting, FOMC members voted unanimously to maintain overnight interest rates near zero, where they have been for the past 12 months. They also voted to continue purchasing at least $120 billion a month of Treasury bonds and mortgage-backed securities. The latter is what has intentionally provided U.S. borrowers with unusually low mortgage rates. When might the Fed slow down its monetary policy support? In its statement, the Fed continued to use the phrase “until substantial further progress is made” lowering the unemployment rate and raising inflation to at least 2%.
Chairman Jay Powell held a news conference on March 17 and said, “The economic recovery is far from complete, so at the Fed, we will continue to provide the economy with the support that it needs for as long as it takes.”
One important thing to remember: to accelerate the U.S. recovery, the Federal Reserve uses monetary policy to .loan money. Only Congress can actually give money away.
Longer-term interest rates have continued to trend upward as the economic recovery gains momentum. Having just passed a $1.9 trillion fiscal stimulus package, the White House has turned its attention to an infrastructure bill of another $2 trillion. Infrastructure spending will likely occur over eight years with the corporate tax rate increased from 21% to 28%.
Recommended Action for Your Bond Portfolio
Most bonds are not appropriate today because of rising interest rates. We’ve reduced our bond market mutual fund recommendations to the list below:
- Ultra-short-term U.S. investment-grade bond funds
- Short-term U.S. investment-grade bond funds
- Government National Mortgage Association (GNMA) bond funds
The most important point in selecting a bond fund in this market is to keep the bond fund’s average duration low. Last month we said, “Keep your bond fund duration under 3 years.” This month, we’re saying to stay under 2 years. The higher the bond fund duration, the faster the fund’s price will decline as interest rates rise.
At this time, we have no recommendations for these types of formerly safe investments:
- Bank CDs – interest rates too low (excessive income risk)
- U.S. Treasury securities – interest rates too low (excessive income risk)
- Muni bonds – excessive credit risk
- High-yield bonds – stock market risk
- Intermediate-term bonds – duration too high (excessive interest rate risk)
- Long-term bonds – duration too high (excessive interest rate risk)
- International bonds – currency risk
- Private and unregistered bonds – always an inappropriate investment
**Please note: Everyone should maintain a safe, liquid emergency fund of at least nine to 12 months of family expenses in an FDIC-insured checking account or money market account before investing in a stock or bond portfolio.**
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.