• Rally On. For the third consecutive month, equity markets moved higher in April, lifted by a succession of robust economic reports and a healthy start to the corporate earnings season.  The breadth of the market rally was wide-spread, with notable strengths seen in areas such as value stocks, mid / small caps, and real estate, in anticipation of a sharp rebound in the economy.

• Strong Earnings. Q1 corporate earnings season is nearing its conclusion, and it has been an impressive one.  Blended earnings, according to estimates by FactSet, are up 50% from the same period last year, and up about 27% from two years ago before Covid hit.  A record-high share of companies surpassed analysts’ profit expectations, and they are topping them by far more than usual.  Managements generally expressed optimism as the economy continues to heal, and earnings are expected to see double-digit growth for the remaining quarters of the year.

• Inflation Rising. Hotter inflation is materializing as the economic restarts continue to gather pace.  Considerable debate rages on whether the inflationary pressures are merely transitory, or may be more persistent in nature.  The ongoing reopening saw an unleashing of pent-up demand being met with supply bottlenecks that have led to near-term spikes in prices which will likely take months to resolve.  But the aggressive fiscal and monetary stimulus employed over the past years, combined with the nation’s mounting debt, lent fears that inflation pressures might be more structural.  There is likely truth to both sides.  For now, it is too early to tell which side will win out, but we maintain a watchful eye as things develop.

• Treasury Market. The steep climb in Treasury yields earlier this year has moderated somewhat, easing concerns that high interest rates will soon provide competition for investment capital from equities.  From a portfolio management standpoint, we continue to keep our clients’ bond portfolio durations relatively short to stay nimble and react to changing rates, and increase our exposure to inflation-protected securities.

• Return to Normalcy. For the first time since the start of the pandemic, Covid case numbers are down in all 50 states.  With deaths in the US falling to their lowest in nearly 14 months, federal health officials cleared the way for Americans who are fully vaccinated to drop mask wearing in most situations.  While the ultimate decision lies with the states and private businesses, and we are by no means out of the woods, this represents a gigantic step as we look forward to making a return back to our normal lives.

• Market Outlook. For now, we remain cautiously optimistic on the prospects of the market.  We remained encouraged by the rebound underway in the economy, and believe there is more runway for continued expansion.  We expect fiscal and monetary policies to remain supportive, both toward the economy and also risk sentiments.  Rising inflation is a concern, although it remains to be seen how much of it is due to transitory factors.

Christopher Lai

Senior Portfolio Manager

05/18/2021