The first quarter saw the market continue its recovery rally from the March 2020 lows, although the pace was more moderate than in the fourth quarter. January saw an early rally fade and retreat, with a monthly loss of –1.0%. In February and March, the market found its footing and recorded monthly gains of 2.7% and 4.4% respectively. In all, the S&P 500 is up 6.2% so far this year.
The statistic most likely to grab the attention of investors at the close of the first quarter is the incredible rally that followed the COVID-19 market crash. For the past twelve months, the S&P 500 has risen an astonishing 56.4%. From the crisis low on March 23rd of last year it has soared 77.6%. Even from the previous pre-crisis high on February 19th of last year, the market has climbed 17.3%. So, any way you slice it, the market has enjoyed a remarkable run over the past year or so.
The major indexes have reached fresh all-time highs, which often leads to concerns among investors about market valuation and the possibility of a bubble. In a normal market, the price-to-earnings ratio (P/E) of the S&P 500 based on expected earnings can range between 13 and 20 times. The current P/E for next year’s earnings is 21.9 times. So it is fair to say the market valuation is on the high side. But these are far from “normal” times. Most strategists believe the economy is in the early stages of what is expected to be a full and robust recovery.
A major reason expectations are so high is because it appears by most measures that we are approaching the end of the COVID-19 crisis. Vaccination efforts have topped expectations and are ramping up. Currently, more than 22% of the US population is fully vaccinated. The focus on the elderly first and now a growing number of eligible adults has helped to dramatically reduce infection rates and deaths. Hopes are growing that life may finally return to normal by the fall.
While the economy has improved a lot, further improvements are necessary before we reach pre-crisis levels. Unemployment spiked to 14.8% from a low of 3.5% last spring, but has since improved to 6.2%. GDP has also improved. In the second quarter of last year, GDP fell more than -10% on a quarterly basis from its peak in 2019, but has improved to just -1.2% below the pre-crisis level.
Travel and hospitality companies were among the hardest hit during the crisis. As the economy reopens and travelers return, airlines, hotels and other travel related industries are beginning to see sharp increases in bookings. The widespread decline in travel activity caused major disruptions in the energy sector as well. In recent months, oil prices have returned to pre-crisis levels after falling dramatically last year. This is good news for energy companies as revenues have increased and layoffs have subsided.
The massive stimulus efforts by the federal government deserve a lot of credit for helping the economy avoid the worst of the possible effects from the COVID-19 crisis. In short, the government saved us from what could have been an economic catastrophe. Multiple waves of stimulus and support programs have allowed businesses to remain open and families to stay in their homes. The support allowed the economy to come roaring back and recent stimulus bills offer hope of ongoing growth for the remainder of the year.
However, massive government spending does not come without consequence. The cost of the stimulus programs is in the multiples of trillions of dollars and comes on the back of a significant increase in the government debt in recent years. At some point the bill will come due and will most likely be paid for by increasing taxes. To that end, there are multiple proposals emerging in Washington that point to potential tax increases in the coming years. This will require many to rethink their income tax and estate plans as laws begin to shift.
For the remainder of the year, we expect the economy to continue to improve and the stock market to continue to rise. Given the rapidly improving status of the COVID-19 crisis and massive amount of government support, the setup for the economy in the near-term is very constructive. As always, we never know what the future will hold and should expect periods of market volatility. But for long-term investors, the outlook remains very positive for the time being.
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Horizon Wealth Advisors is a Houston based fee-only wealth management firm. Horizon is a fiduciary advisor. We specialize in helping successful individuals and families understand, organize, and manage their often complex financial situations. Horizon offers integrated financial planning and investment management services.