Welcome to the March 2021 Newsletter. This month, we’re discussing the COVID-19 vaccine, the stock market, the economy, and other news.
Summary
Our economy is entering the early stages of a major recovery from the setback caused by the pandemic in the spring of 2020. The fiscal stimulus, accommodative monetary policy, and growing distribution of COVID-19 vaccines support a strong economic recovery this year. The yield curve indicates economic growth is likely to accelerate this year.
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, so we encourage investors to maintain patience and courage during these times. We continue to 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. All portfolios should remain fully invested.
The Economy
Employment
U.S. nonfarm payroll employment increased in January by just 49,000, and the unemployment rate dropped to 6.3%. The Labor Department refers to this unemployment number as U-3. The unemployment rate primarily dropped because too many people have stopped looking for a job.
The all-encompassing unemployment measurement from the Labor Department is called U-6. This includes total unemployed, plus all persons marginally attached to the labor force, plus total employed in part-time jobs who desire a full-time job. In January 2021, U-6 was at 11.1%, a more realistic number for these times. In January 2020 (before the pandemic), U-6 was at 6.9%. There are currently 9.9 million fewer people employed than in January 2020.
The November payroll number was lowered by 72,000 to 264,000. The December payroll number was revised down by 87,000 to -227,000. The rolling three-month payroll average decreased to only 29,000 this month from +293,000 last month.
Gross Domestic Product (GDP)
The Bureau of Economic Analysis said the advance estimate of the 2020 fourth-quarter GDP increased by 4.1%.
The increase in fourth-quarter real GDP reflected an increase in exports, nonresidential fixed investment, Personal Consumption Expenditures, residential fixed investment, and private inventory. Using the word “real” to describe economic terms always means “after inflation.” Therefore, if inflation was 2%, then GDP last quarter increased 6.1% before inflation.
Preliminary data is suggesting GDP growth will be 6% to 8% for 2021! This is massive but alarmingly euphoric for the stock market as the year progresses.
Inflation
Annual inflation increased to 1.5% in January as measured by the Personal Consumption Expenditures (PCE) index. The core PCE index, which excludes food and energy, also increased in January to 1.5% from 1.4% in December. The Fed’s long-term core PCE target remains at 2%.
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 |
| 5 Year | 2.39% |
| 10 Year | 2.15% |
| 30 Year | 2.11% |
This month’s estimated annual inflation numbers are only 0.06% higher on average than last month’s.
Stock Market
Commentary
Based on the most recent 52-week price range, parts of the stock market have already become euphoric and over-heated, and they should be avoided. In our opinion, those areas are:
- Enterprise software – Crowdstrike, Cloudflare, Twilio, and others are up on average 300%.
- Electric vehicle manufacturers – Tesla, NIO, and others are up on average 1,900%.
- Clean energy – First Solar, Plug Power, Vestas Wind, and others are up on average 900%.
- Cannabis growers – Canopy Growth, Tilray, Cronos, and others are up on average 1,000%.
- Stay-at-home stocks – Peloton, Zoom, Zillow, Teledoc, and others are up on average 600%.
- E-commerce stocks – PayPal, Square, Fiverr, Shopify, and others are up on average 1,600%.
- Other categories to be extremely careful of are Special Purpose Acquisition Companies (SPACS) and bitcoin.
Even so, an investor with a highly diversified and low-cost portfolio should do well in 2021 and 2022. Always maintain a portfolio that matches an investor’s risk tolerance. New money can be added to a stock portfolio, but only on a dollar-cost-average basis spread over 12 months.
Stock Market Valuations
We believe the S&P 500 Index companies will have operating earnings of $180 in 2021. With a PE ratio of 21, the Index should have no trouble reaching and maintaining 3,800. The market closed Friday, February 26 at 3,811.
During the latter six months of 2021, investors will look for $195 earning in 2022. With a PE ratio of 21, the market should then be able to reach the 4,100s.
What is Warren Buffett buying?
In the quarter ending December 31, Berkshire Hathaway purchased $8.6 billion of Verizon Communication (VZ) stock and $4.1 billion in stock of the oil company Chevron (CVX). In the first three quarters of 2020, Mr. Buffett also purchased $15.7 billion of his own stock (BRK). Note that BRK-A closed on February 26 at $364,580 per share. BRK-B closed at a more reasonable $240.51 per share.
Why is gold’s price dropping?
Gold tends to perform inversely to interest rates. As rates have been rising, gold’s price has recently declined. We are not gold bugs at Lorenz Financial, so we don’t advocate that our clients own a significant amount of gold or silver bullion. An investor might choose to own some bullion, but we recommend only 1% to 3% of a portfolio.
Recommended Action for Your Stock Portfolio
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.
Sector exchange-traded funds offer a choice between mutual funds and individual stocks. The S&P 500 Index contains the 500 largest companies in the U.S. Below are the 11 sectors and ticker symbols that make up the S&P 500 Index and where we believe opportunities lie in 2021.
| Overweight (buy, don’t sell) | Equal Weight | Underweight (sell, don’t buy) |
| Consumer Discretionary (VCR) | Communication Services (VOX) | Consumer Staples (VDC) |
| Financials (VFH) | Energy (VDE) | Utilities (VPU) |
| Industrials (VIS) | Healthcare (VHT) | |
| Materials (VAW) | Real Estate (VNQ) | |
| Tech (VGT) |
COVID-19
A Quick Look at the Three Available Vaccines
Which vaccine is best? The one a person can get first!
| Vaccine Effectiveness | Pfizer | Moderna | Johnson & Johnson |
| Number of Doses | 2 | 2 | 1 |
| Overall Efficacy | 95% | 94.1% | 66.1% |
| Efficacy Against Severe Disease | 75% | 100% | 85.4% |
| Efficacy in People 65 & Older | 94.7% | 86.4% | 68.6% |
| Efficacy in the U.S. | 94.9% | 94.1% | 72% |
Vaccine Development
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. The U.S. originally agreed to purchase 100 million doses of the Pfizer vaccine to be delivered in December through the end of March. In late December, the federal government purchased another 100 million doses. The Pfizer vaccine has been shown in a small study to be 80% effective against the UK variant of the virus.
On February 25, Pfizer announced they are studying their first booster shot. It contains 30 micrograms of their standard vaccine and is to be taken 6 to 12 months after receiving the initial two-dose regiment. As of February 28, 38.4 million doses of the Pfizer vaccine have been dispensed in the U.S.
Moderna’s two-shot vaccine, taken four weeks apart, has shown to be 94.1% effective in preventing COVID-19. On February 24, Moderna announced additional capital investments to increase its 2022 vaccine manufacturing capacity to 1.4 billion doses.
Moderna is testing three one-shot, 50-microgram booster options. One is specifically to combat the South African variant, the second to broadly fight new mutations, and the third to be available as a half dose of their existing 100-microgram vaccine. On February 24, Moderna announced it has shipped its first booster to the National Institute of Health to begin Phase 1 human clinical trials against the South African variant.
Moderna expects to deliver 100 million doses to the U.S. by the end of March and another 100 million doses by the end of June. As of February 28, 36.7 million doses of the Moderna vaccine have been dispensed in the U.S.
On February 11, the Department of Health and Human Services announced they have purchased 100 million additional COVID-19 vaccines from each company (Pfizer and Moderna) for delivery by the end of July. This increases the total quantity of vaccines purchased to 600 million – 300 million from each company. 600 million doses are enough for 300 million Americans to receive 2 doses each as prescribed.
Johnson & Johnson has submitted data to U.S. regulators to grant approval of their COVID-19 vaccine. On February 26, an FDA advisory panel voted to recommend the FDA grant emergency use authorization (EUA) of the vaccine. On February 27, the FDA granted EUA.
Preliminary results have shown the J&J vaccine to be 66% effective at preventing moderate and severe COVID-19 disease overall. In the U.S., the vaccine was 72% effective during J&J’s Phase 3 trial, as U.S. participants were minimally exposed to the new UK, South African, and Brazilian variants. The J&J vaccine has the distinct advantage of requiring only one injection and can be safely stored at normal refrigerator temperatures for weeks, making distribution much easier than other approved vaccines.
J&J said they will provide 20 million doses by the end of March and 100 million doses by the end of June for U.S. distribution.
Novavax’s vaccine candidate requires two shots, three weeks apart. The company expects to have results of their U.S. and Mexico Phase 3 trial by the end of March. If approved, Novavax has said they can produce a couple billion doses over the next year.
Novavax’s vaccine doesn’t need to be kept at freezing temperatures. That’s an advantage for clinics and pharmacies lacking freezer capacity. Dr. John Moore, Weill Cornell Medical College said, “The Novavax vaccine looks as strong as any vaccine, and it may have better durability.”
AstraZeneca has been dealt another blow to its vaccine being accepted by the world community. In a clinical trial of only 2,000 South African volunteers with a median age of 31, its vaccine has been shown to only be 10% effective against mild to moderate cases of that country’s COVID-19 variant. The South African health minister said they would temporarily halt a planned rollout of the AstraZeneca vaccine until there was more information on the vaccine’s efficacy.
Virus Statistics
As of February 27, the Daily New Cases chart shows a dramatic drop in new cases.
The Daily Death chart peaked on January 12 but has since dropped significantly. We hope this continues in a strong decline.
Vale SA: This Month’s Corporate Bad Boy
Source: Page A1, The Wall Street Journal, February 5, 2021
Brazilian miner Vale SA (VALE) has agreed to pay the equivalent of $7 billion in compensation for the collapse of its dam two years ago that killed 270 people in eastern Brazil, 250 miles north of Rio De Janeiro.
In January 2019, a Vale dam at one of its mines burst. This unleashed a tsunami of liquid mining waste speeding down the valley, wiped out the company’s cafeteria where many workers were at lunch, and destroyed nearby homes. Two years later, the bodies of 11 victims still haven’t been found.
The settlement funds will be spent on environmental projects, shoring up local water supplies, improving health services, and replacing the bridges, railroads, and roads that were destroyed by the flood.
In January 2020, Brazilian prosecutors charged the former Vale CEO and 10 other high-level company officials and directors with homicide and a variety of environmental crimes. Also charged were five people from the German company that audited the dam and who repeatedly judged the dam as being safe.
Payment for Order Flow
The Reddit-fueled frenzy in stocks like GameStop in January is prompting calls for regulators to reconsider a decades-old practice in the U.S. stock market: payment for order flow. The practice, in which high-speed trading firms pay brokerage houses for the right to execute orders from individual investors, has long been controversial. Some say it warps the incentives of brokers and encourages them to maximize their revenue at the expense of customers. For sure, it’s BIG money!
| Company Using Payment for Order Flow | 2020 Income |
| TDAmeritrade | $1.2 billion |
| Robinhood | $700 million |
| E*Trade | $450 million |
| Charles Schwab | $250 million |
The biggest source of payments was from electronic trading firms Citadel Securities and Susquehanna International Group LLP. These firms make money by selling securities for slightly more than what they paid for them.
Dennis Kelleher, president of Better Markets, said, “Payment for order flow, at the end of the day, is legalized bribery that appears to incentivize brokers to violate rules.” Adding to the checkered reputation of payment for order flow, one of its early practitioners was Bernie Madoff, who is now serving a 150-year jail sentence in federal prison for orchestrating the largest Ponzi scheme in history.
Bond Market
Commentary
Last month, we suggested that the 40-year bull market in bonds is finally over — and that as interest rates rise, existing bond prices will fall. How much ill 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. See what has happened to these three bond funds this year, all with low credit risk (AKA low risk of default):
| Bond Fund Name | Symbol | Credit Rating | Average Duration | YTD Performance |
| Vanguard Long-Term Treasury Adm | VLGSX | AAA | 18.58 years | -8.98% |
| Vanguard Intermediate-Term Treasury Adm | VSIGX | AAA | 5.34 years | -1.83% |
| Vanguard Short-Term Treasury Adm | VSBSX | AAA | 1.95 years | -0.03% |
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. Please note: This is not an indictment of Vanguard bond funds. All bond funds with a comparable duration profile will perform in a similar manner.
Federal Reserve
Federal Reserve Chairman Powell said on February 23, interest rates are rising due to expectations that:
- Inflation will soon return to more normal levels.
- The U.S. economy will see high growth in 2021.
- U.S. corporations will continue to see an increase in corporate profits this year.
- The country will see a robust and complete economic recovery.
Remember: As the interest rates rise, existing bond prices fall.
U.S. Treasury
The Congressional Budget Office forecasts the federal budget deficit will total $2.3 trillion in 2021. If the $1.9 trillion fiscal stimulus package is passed, the budget deficit will grow to $4.2 trillion. If then an infrastructure bill is passed, that will also increase this year’s budget deficit.
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 thing to remember in selecting a bond fund in this market is to keep the bond fund’s average duration low – under 3 years. The higher the bond fund duration, the faster the fund’s price will decline with rising interest rates. For example, a bond fund with an 8-year duration could easily have its price decline 8% if corresponding interest rates rise only 1%.
At this time, we have no recommendations for these types of 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.