Market Update - April 2021

As Spring is about to turn into Summer – there is growing hope for a lifting of pandemic restrictions (including potential travel plans!)

To start off, here is a list of some interesting stock market statistics:

1. In November 2020, the global stock market capitalization reached a record $95 trillion, surpassing pre-coronavirus levels.

2. There are 19 stock exchanges in the world with a market capitalization of more than $1 trillion (Nasdaq and the New York Stock Exchange have more market cap between them, than the rest of the exchanges on the list combined).

3. Stock market declines of 5% to 10% generally require a month’s recovery time (A drop of 10-20% usually takes four months of recovery, while a 20-40% decline takes 15 months).

4. On average, stock market corrections of more than 10% but less than 20% happen once every two years.

5. Valued at $2.25 trillion, Apple leads the world’s corporations in market capitalization.

6. The stock market usually performs the worst in September.

7. The most expensive stock in the world is Warren Buffet’s Berkshire Hathaway ($430,126 per share, today).

8. Changes in stock prices were expressed as fractions until the year 2000.

9. Australia has had the best performing share market in the world from 1900 to 2009.

10. Women first worked on the New York Stock Exchange in 1943 due to a shortage of male workers during World War II.

Taking a look at what’s been happening in the last little while - market conditions proved rather mild for risky assets last month, with global equities remaining firmly engaged in their uptrend and bonds treading water.

The stock market fear index (VIX) has even reached its lowest point since the beginning of the pandemic reflecting both the acceleration of global vaccine rollouts and the growing evidence of their effectiveness.

Regarding this last point, data from Israel – the most advanced country in its vaccination campaign with almost 63% of its population having received at least one dose – show that the country seems, for the moment, to have effectively defeated COVID-19.

Concretely, one economic figure that has been surprisingly strong lately is U.S. retail sales, which soared in March to a whopping 17% above their pre-crisis level.

Clearly, this is a result of the one-time stimulus checks included in the Biden administration's recovery package passed the very same month. We should, therefore, expect to see subsequent retail sales figures fall back to earth. Nonetheless, it does demonstrate how the current economic rebound is light-years away from the weak recovery that followed the financial crisis.

Is the mild Spring an indication of a hot Summer? It appears so, both literally and figuratively for the economy.

For instance, the build-up of sizeable savings since the onset of the pandemic – about $2.3 trillion above the pre-COVID trend in the U.S., or ~11% of GDP – accentuated by the second round of U.S. stimulus in March highlights the potential for a strong pick-up in aggregate demand in the quarters ahead.

Assuming the health situation allows for a gradual reopening of the vast majority of economic activity over the coming months (which is not a certainty), one should not believe that all of the excess savings will be converted into consumer spending overnight. However, healthier household balance sheets do suggest a greater capacity to spend additional income when economies do reopen, provided that consumer confidence is high enough. Judging by the latest readings on this matter, it appears this will be the case – the U.S. Conference Board Consumer Confidence Index increase over the last two months is its biggest since 1974.

While it is fairly clear that the string of robust economic data will extend into the Summer, the same holds for inflation figures. In fact, it is during the current and next month that the inflation that has been expected for quite some time will reveal year-over-year increases well above 2%.

Now, will this inevitable jump in prices be brief or the beginning of something more lasting? That's the question of the hour, but the reality is that for the coming year, what matters isn't so much what we think, but what central bankers think. In this regard, Federal Reserve Chairman Jerome Powell never misses an opportunity to reiterate his institution’s view that “one-time increases in prices are likely to only have transitory effects on inflation.”

While this approach may seem complacent, it's important to recall that U.S. core inflation has remained below target for most of the past decade. Thus, a relatively higher rate of inflation for an extended period of time would only bring the long-term average closer to the 2% target – good news from the Fed's perspective.

Why is this important? Because it means that the Fed is now willing to let the business cycle run at full throttle while keeping an accommodative monetary policy stance not only now, but even as labour market conditions tighten. With total jobs roughly 8 million below their January 2020 level, U.S. employment still has a long way to go before it even qualifies as tight in the eyes of the Fed.

What if price increases turn out to be more than brief and far exceed Federal Reserve expectations? FOMC members know they could reach into their inflation-fighting toolbox, which is far better equipped than their deflation-fighting toolbox (just ask Japan...).

If conditions have been rather ideal for risk assets so far this Spring, the looming economic heat this Summer could prove uncomfortable at times, should markets have doubts about the brief nature of rising inflation. Besides, while not excessive, the relatively high level of our sentiment indicator implies an increased vulnerability of stock prices to any bit of bad news in the short term. For instance, negative surprises on the pandemic front can't be ruled out until it’s over... and the dramatic situation in India shows that it clearly isn’t.

Fundamentally though, the acceleration in the vaccination campaign together with a mix of accommodative monetary and fiscal policies should result in a period of strong economic growth over the remainder of the year. For the U.S. stock market, current estimates project a growth potential of about 13% over the next 12 months.

While early 2021 has resulted in many investments increasing in value, just as many others have been in decline. We continue to believe that a portfolio of diversified securities provides the optimal return vs. risk, but are adjusting our model to try and best prepare for what should be a very good rest of the year.

Mortgage Rates Update:

Rates as of May 17th 2021; assuming 25 year amortization; $300,000 mortgage; 90 day rate guarantee; and owner-occupied property

5 - year fixed: 2.19%

4 - year fixed: 2.04%

3 - year fixed: 1.89%

2 - year fixed: 1.94%

1 - year fixed: 2.34%

5-year variable: Prime—1.15% (effectively 1.30% right now)

Disclaimer: These rates are for information only and are not guaranteed until an application has been submitted to the bank. Rates are subject to change at any time without notice.

As always, please feel free to reach out to any of our team members to discuss any questions you have with regards to your investments.

Enjoy your May long weekend!

-The Creed Capital Team

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