FIRST QUARTER NEWSLETTER 2021

  As the first quarter draws to a close, the month of March has lived up to its reputation for Madness. The NCAA College Basketball Tournament is in full swing after the COVID hiatus; and brackets are crashing everywhere. People who have gotten their vaccine have suddenly realized they can’t go out into the world with their sweats, untamed hair, scraggly beards, and the extra few pounds they’ve been living with at home since last March and are panicking. A rotation is underway in the equity markets as investors take some profits off the table, shifting away from leaders who emerged or strengthened during the COVID crisis and saw their stock prices soar. The markets are volatile, as investors try to figure out who will be the next leader. With the anticipated “reopening” of the US, the new Administration controlling the House and Senate, the desire to spend a great deal of money on Infrastructure, and the problem of how to eventually pay the massive stimulus, analysts are guessing what industries may prove winners over the next year.

  We frequently quote from Franklin Templeton, ‘What Happened Last Week,” now being penned by Griff Curtin. The 3/29/21 edition, period ending 3/25, ranks the top three performers in the S&P YTD; Energy +34.8%, Financials +17.3% and Industrials +11.3%. The bottom 3; Consumer Staples +1.7%, Consumer Discretion +1.9% and Information Technology +2.0%. The S&P benchmark was up 6.2% and Energy has been the 16^th seed team, which is suddenly catching fire.[1]

  Nuveen’s, Saira Malik, CFA/CIO, “Weekly Equities Commentary” for 3/29/21, calls for “more market leader shifts” throughout the year. Infrastructure spending could be massive, with a trillion dollar package being eyed by the Biden administration. Malik explains such a package would likely fuel U.S. Manufacturing and blue-collar job creation. Cyclical sectors like Materials and Industrials would likely be favored. The administration may attempt to pay for it by significantly raising taxes on corporations and high-income families, which she says would “likely create pockets of volatility as investors recalibrate expectations for growth and valuations and could also lead to earnings growth head winds.”[2]

The “Weekly Equities Commentary” outlines other risks for the market:

• At some point, the Fed will need to raise rates, given the massive spending on stimulus and anticipated Infrastructure package.
• Volatility is likely to continue as market leadership shifts.
• Global shocks may provide major disruptions in the market. Supply chains are already tight. The recent crisis involving blocking of the Suez Canal by a massive container ship which went aground, is a case in point. Nuveen reports this was “the worst disruption since 2004” and is “costing the global economy $400.000,000 an hour.”

Just thinking about that for a minute is enough to bring on March Madness. Also, from Nuveen on the income front, they highlight Municipal bonds as standing to benefit from rising taxes, as well as increased funding by municipalities on Infrastructure projects. [3]

  As investors search for reliable, and hopefully growing income, Utilities have been gaining favor in March. Reuters reported on 3/26/21 the S&P 500 Utilities Index “outperformed the broader market this month, rising 9.3%...compared to a 4.3% gain in the benchmark index.”[4] Another factor which is driving interest for some investors is the possibility for increased spending on “green” utilities.

  Nick Langley and Josh Duitz, portfolio managers for Aberdeen Standard Investments, recently featured on Asset TV mid-March, discuss what Infrastructure spending really means. They pointed out that it is not “just about bridges and roads.” Increasing Broadband to areas of the country that lack capacity would increase employees’ ability to work from home, and better utilize technological advances in the workplace. Infrastructure spending can facilitate renewable energy and green infrastructure. Nick Langely points out that “investing in real or hard assets that have a long life…ensures that we have growing asset bases and therefore growing earnings, growing cash flows,” Duitz adds, “and with the stimulus…when we talked about all the packages we’ve had in the United States…those are really stabilization bills, right?” He goes on to say, “that’s not stimulating the economy…an Infrastructure Package will stimulate the economy…it increases productivity.”[5]

  If you have a portfolio in one of our managed models, you have probably noticed more activity than usual since late February. We have been shifting some assets from positions that performed very well during the COVID crisis and grew to represent a significantly larger percent of the portfolio, to some underrepresented sectors. These sectors may benefit from the reopening of the U.S. economy and a return to more normal social activities. Additionally, we look to companies with dependable dividends, which can stand in for bonds in a time where inflation is a risk, and rates are still exceptionally low, as well as companies which could benefit from a major increase in Infrastructure spending. We look forward to talking with you about your portfolios, and as it becomes increasingly safer, to have you in for a review.

  When not watching the markets or working on our taxes, we enjoy the NCAA Basketball Tournament, of course not on the court, but discussing brackets, watching multiple games at once, and the whole nail biting, edge of the seat, snack-binging drama. Although we seldom watch regular season college basketball, March Madness is a favorite of ours. One of us spends weeks beforehand studying teams and filling brackets (just for fun, no gambling), while the other enjoys watching her reactions as each game plays out, and bracket performance goes up or down.

 Dorsey Wright, whose research, and technical analysis we use heavily in our portfolio management, did a piece on March Madness in 2013, and it comes back around every couple of years. The article begins with an explanation of why seeding began many years ago and how it works. Dorsey Wright likens the “qualitative and quantitative evaluation” involved in seeding to the research done in stock selection. Saying, “like the NCAA Selection Committee is not going to make ‘seeding’ decisions based on a team winning 1 or 2 games, it is not reasonable to expect you to make portfolio management decisions based on very short-term performance.”[6]

  Dorsey Wright measures attributes of stocks based on technical analysis, looking for momentum to indicate opportunity. Relative strength of a stock vs. others in its universe is not measured by outperformance over a few days, any more than a low seeded team winning on a given day in a single elimination format can measure the potential of the team to outperform throughout the Tournament. The article concludes, “relative strength over 6 months may help identify when outperformance has in fact become a trend of outperformance.”[7]

  So, we will continue to study and evaluate, and to look for a trend of outperformance, or a reversal of that trend. We hope you are well and looking forward to the warmer months ahead. As for the Madness, we do not know what form it will take over the rest of the year but expect it will still be around. That’s OK; it will be easier to manage from the vantage point of the front porch on a summer day, with a cool beverage in hand. Our best to you, as always.

      Warmly; The Galarneau Group