My daffodils and crocuses bloomed on the same day this spring. This was unexpected. Usually the crocuses are first, and the daffodils follow. This flower rotation is a simple reminder that each spring is a bit different than the last one. Flowers bloom at different times, the bloom duration changes and even the color intensity of each flower can vary from spring to spring. Maybe I’m noticing how different this spring is from the last because we had a particularly cold winter. Comparing the two seasons really magnifies the differences.
While this spring will be different from the last, there are some things we can count on to stay the same: There will be flowers, trees will blossom and birds will return home singing.
As a country, we just endured a yearlong COVID economic “winter” and a spring recovery is finally starting to blossom. But just as each spring season is slightly different, each economic recovery is also distinctive. COVID caused incomparable economic disruption and in response, the size of the economic stimulus was also unprecedentedly large. We expect that this recovery will likely be very different from other economic recoveries in the past. At the same time, there will be some familiar similarities.
The first signs of what we consider a COVID economic recovery were first seen in early November. At that time, both Moderna and Pfizer began to release vaccine clinical trial results that seemed to far exceed many people’s expectations. An inflection point in the markets occurred with the release of these scientific results. The economic market began to anticipate an improving business cycle and an eventual return to what we think of as “normal” monetary conditions.
Typical of most post-recession cycles, small company stocks led the way out. Starting in November, these smaller stocks outperformed large company stocks. Value stocks, which tend to be more economically sensitive and better suited for the recovery period, also began to outperform growth stocks. Growth stocks are dominated by the technology sector and as a result, their business models tended to be more resilient to COVID disruptions. Foreign and emerging market stocks, which were harder hit by COVID, have also recovered stronger than U.S. stocks since the November COVID “spring” began.
You may recall that the theme for our Investment Outlook this year is balance. By that we mean that we strive for balance between small and large company stocks, recovery and resilient stocks and international versus U.S. stocks. Because of our emphasis on balance, our portfolios are well positioned for the phase of renewed growth that began in November.
Will we return to “normal”?
Clients are asking this question of us a lot. I do believe we will return to more normal economic conditions, with the important caveat that our concept of “normal” is always changing. For instance, think about how it’s now normal to see pre-teens walking around with cell phones. That wasn’t part of our definition of normal social conditions as recently as 10 years ago. Our collective concept of “normal” shifts over time.
I believe our new normal will incorporate many of the technological changes we experienced under COVID. For instance, Zoom, Uber Eats and Amazon are now firmly part of our new habits. These tech solutions will not permanently replace in-person meetings, restaurants or retail stores. Instead, both options will coexist and find a new balance. There will naturally be some winners and some losers in the economic realignment. Generally, though, I believe the magnitude of realignments is grossly overstated.
Yesterday, for example, I was out in my garden enjoying the spring blooms. I started wondering when my irises would pop. Then I heard something I haven’t heard in a while: Airplanes flying overhead. Lots of them! While I’m not thrilled about the return of carbon and noise pollution, I also recognize that airline traffic essentially is an economic “bloom.” More planes overhead is a foreshadowing of economic growth, just as green shoots in the garden are a signal that my irises are ready to return. This economic bloom presents itself as an increased demand for energy, travel services and consumer goods.
In the financial markets, the economic bloom means higher, more normal, yields for bonds as the market adjusts back to something similar to previous conditions. As you know, rising rates cause downward pressure on longer-term bond prices. That’s why we are posturing our bond portfolios in a more defensive position. We are favoring more opportunistic bond strategies that tend to be less interest-rate sensitive.
To recap, keep in mind that each spring is a bit different from past springs. That is why avid amateur gardeners like me try to maintain lots of balance with different varieties of flowers in our gardens. Certain plants that bloom like crazy one spring might end up being duds during another spring’s weather conditions, and vice versa. Similarly, each economic recovery is unique. That’s why it is so important to have a good balance of many types of investments in our portfolios.
I hope you have a healthy and joyous spring. Please contact your wealth advisor or me with any questions or concerns about your portfolio.
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