This blog will serve as follow up to our previously released Q2 Investment Themes and is intended to provide an update on what we are seeing as well as our current outlook. 

Here are the top three things we are covering in this week’s blog:

  1. Stocks recovered from prior month losses and shot back to all-time highs.
  2. Coming off one of the worst months for economic data one year ago, almost every single reading showed astronomical YoY growth. But a deeper dive into the data reveals major issues in the jobs market.
  3. The traditional 60/40 allocation has been a staple investment strategy for decades, but recent market shifts show that period may be ending.

Market

The month of April was forecasted to be a tremendous month for economic comparisons and an accelerated economic reopening. The U.S equity market accurately reflected those lofty expectations as earnings reports and economic data rolled in. Following a strong bounce from the previous months selling, the S&P 500 built upon its early gains and finished April up 5.25%[1].

Coming out of a large sell off in tech in early March, the NASDAQ was able to maintain its early gains in April and finished the month up 5.94%[2].

April was another great month for Industrials and Financials as rising rates, relative valuation, proposed fiscal spending, and the economic reopening, pushed these sectors to a gain of 3.86% and 6.51% respectively[3].

Commodities were driven 8.73% higher, outpacing the broader equity market, as April’s inflation numbers rose, and the economic reopening continued[4].

Despite stricter Covid restrictions, European equities returned 4.83% due to a growing economy and rising inflation[5].

After a correction in early February, emerging markets struggled to find a direction in April as much of Asia continues to face slowing growth and inflation[6].

Economy

Total Unemployment Insurance Claims reached a 13-month low in April, signaling a slowing in layoffs and a strengthening labor market. Nonetheless the 16 million total unemployment claims remain well above the pre pandemic levels[7].

A highly anticipated April job report shocked many economists and wall street as the MoM Job growth came in at +266k jobs, vastly under the 916,000 expected[8].

The month of April saw a large spike in consumer sentiment as reopening and vaccine rollout continues[9].

Retail sales jumped to the highest levels in 10 years, due to circulating fiscal stimulus, consumer confidence and historically easy YoY comparisons to the 2020 April lows[10].

As consumer confidence and reopening accelerated in Q1, analysts had high expectations for April’s earnings season. This estimate came true with 285 out of the 500 companies in the S&P 500 flashing an average YoY earnings growth of 54%, with Materials, Consumer Discretionary, and Financials leading the way[11].

With data released this spring continuing to show historic YoY growth, economists expect a spike in CPI and GDP this quarter before tapering slightly over the next year. Real GDP grew 0.40% in the first quarter of 2021 and is expected to reach 12.1% in the second quarter. This is a big acceleration over the negative GDP reports for the prior three quarters. Inflation also rose 1.90% in the first quarter of 2021 and 0.8% in April[12]. The expected massive spike in YoY growth will likely be reflected when GDP & CPI data is released at the end of Q2[13].

Death of the 60/40 Portfolio

Often the phrase, “the market only goes up over time” is used to persuade investors to blindly dump their life savings into an equity heavy allocation. For protection from major drawdowns, the recommendation is made for an investment in fixed income strategies. As a result, the equity side of your portfolio performs during strong market years, and the fixed income protects during years of hardship. Over the past 40 years, this diversification strategy has been effective and produced exemplary returns. However, the last year has begun to show glaring issues with this strategy.

Beginning in March of 2020, when the equity market fell over 30% in just 18 days, instead of protecting portfolios, sporadic treasury yields sent bonds on a turbulent ride to a meager gain. As the market began to recover in the latter part of 2020, rising yields drove bonds into a downward spiral. This trend continued into the first half of 2021, as spiking yields led long term bonds into correction territory. With this market environment becoming the new norm, we went searching for a true diversification strategy.

While the market has seemingly gone straight up for the past 100 years, that has not been without long periods of poor performance. On three individual occasions the market was flat/down over a 12+ year period. As a result, many near retirees saw their portfolio balance drop at the time they needed to begin taking distributions[14].

For the last 40 years, proper diversification could be achieved through a traditional 60/40 stock/bond mix. However, as we discussed in previously, the market is now facing a period where bond yields are sitting near zero and equites are at all-time highs. Because of this, the traditional approach may no longer be the best option for investors looking for long term growth with downside protection.

To ensure portfolios are prepared for any market environment, we turn to the true diversification strategy. Contrary to the traditional equity/bond mix, this approach diversifies through 4 Macro Quadrants: Growth, Decline, Deflation, and Inflation[15].

Once we have an idea for what true diversification looks like on a macro level, we can begin applying the drivers that will succeed in those environments[16]

Furthermore, dividing the quads into subsections provides a roadmap for the specific asset allocations needed to achieve true diversification. Through this approach, your portfolio will always have a component that is working to protect against long term down/flat periods[17].

Another way of looking at this is through the lens of a Zig/Zag allocation. Over time, a portfolio that combines a strong performer (Zig) with an anti-correlated long asset (Zag) significantly outperforms while avoiding major drawdowns. Combining anti-correlated assets ensures that your portfolio will have a profitable component no matter the market environment. On top of this, Zag like alternative investments serve as a “entrepreneurial put option” and provide you with liquidity when all else has dried up[18].

This is something we will dive deeper on in the coming months as we continue to search for a solution to the death of the traditional 60/40 portfolio.

In Summary:

  1. Quad 2 remains enacted through the first month of Q2 with the support of tremendous economic growth, additional fiscal stimulus, and growing consumer sentiment.
  2. Concerns remain in the coming months as many of the economic tailwinds turn into headwinds in Q3.
  3. Finally, longer term, we see a larger cyclical shift coming that will require the consideration of additional asset classes beyond stocks and bonds that we will be discussing in future blogs and videos as well as upcoming meetings.

We hope you have enjoyed getting a deeper look into our investment research and look forward to providing this to you each quarter going forward. Thank you from the entire Konvergent Team!


[1] Slide 4: Markets Surge Higher

[2] Slide 5: Tech Jumps Following March Selloff

[3] Slide 6: Financials and Industrials Grind Higher

[4] Slide 7: Commodities Spike on Rising Inflation

[5] Slide 8: European Equities Move Higher

[6] Slide 9: Emerging Markets Struggle

[7] Slide 11: Total Claims Decrease

[8] Jobs report April 2021: Hiring boom goes bust (cnbc.com)

[9] Slide 13: Consumer Sentiment Increases

[10] Slide 14: Retail Sales Spike

[11] Slide 15: Corporate Profits Jump

[12] CPI April 2021: Inflation speeds up in April as consumer prices leap 4.2% (cnbc.com)

[13] Slide 16: GDP & Inflation Grow

[14] Slide 18: Down/Flat Periods

[15] Slide 19: True Diversification

[16] Slide 20: Return Drivers

[17] Slide 21: Diversifiers

[18] Slide 22: Asset Correlation

Top Wealth Management Secrets Checklist

Discover what your business needs NOW for peak performance

Just tell us where to send it

Check your email for your free guide.  

Make sure to check your "promotions" or "spam/junk" folders if you do not see it in your inbox.

The Key to Optimizing Your Business

Discover how you can optimize your business and personal plan to be prepared for whatever comes next.

You have Successfully Subscribed!