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The Dow wrapped up the final day of March on a slightly negative note but finished the month with a 6.62% return in March, compared with the NASDAQ return of 1.54% for the month. Matching the DOW, the S&P 500 finished the month with a solid 6.6% gain. The 6.21% outperformance of the DOW over the NASDAQ represented the biggest monthly spread between the main indexes since February 2002. The Year-to-date gains for the DOW are 7.8% versus 5.8% for the NASDAQ and 5.77% for the S&P 500.

As short-term interest rates have ticked up with the 10-year Treasury yield sitting at 1.70% versus same time last year 0.59%, borrowing costs have gone up and so has the volatility in the market. In volatile times folks tend to pull their money from the market because they are afraid the market will correct. Here are some facts regarding the markets.

“TIME IN” vs. “TIMING”-The split between “up” and “down” time periods for the S&P 500 index from 1950 to the end of 2020, i.e., the last 71 years, as measured by: Days: 54% up and 46% down; Months: 60% up, 40% down; Quarters: 67% up, 33% down; Years: 73% up, 27% down; 5-Year Rolling Time Periods:79% up, 21% down; and finally 10-Year Rolling Time Periods: 89% up, 11% down.

About now folks should be receiving their 3rd round of stimulus checks; $1400 per person per household. When we think about the economy and the market prospects moving forward, we think about the velocity of money in the economy. This $1400 has a multiplier effect. If each taxpayer that received $1,400 had a marginal propensity to consume of 60%, the initial taxpayer would save $560 and spend $840, and then in turn the party that received the $840 would save $336 and spend $504, and the next party would save $202 and spend $302, and so on. Ultimately the original $1,400 cash payment would result in $2,100 of economic activity, i.e., $840 + $504 + $302.

Stock Market Valuations. Are stocks cheap, or are they expensive? Frustratingly, the answer is “yes,” depending on the frame of reference. For example, the average Price/Earnings (P/E) multiple of the S&P 500 (based on earnings two years in the future) is 20x, which places its valuation in the 90th percentile over the last 30 years. In other words, based on this valuation metric, the S&P 500 has only traded at this valuation or higher, 10% of the time. However, based on current, historically low interest rates, the average valuation of the S&P 500 is only in the 40th percentile (i.e., over the last 30 years, the S&P 500 has traded at this valuation or higher 60% of the time).

For perspective, the yield on the 10-year yield and how that has previously affected the market consider this; the 10-year Treasury averaged 2.3% in the five years leading up to the pandemic (2015 – 2019). Over this timeframe, the S&P 500 generated an annualized return of 11.7%.

While equities look more attractive than bonds from a valuation perspective, there are no sure things in investing. Hence, following a disciplined investment plan that includes intelligent diversification is as important as ever. Traditional fixed income plays a role in diversifying portfolio risk. However, given low starting yields, forward return expectations for these instruments are slim and will weigh on portfolios that consist solely of equities and traditional fixed-income investments. There are other forms of income investing and different types of portfolio strategies that can enhance returns. Indeed, it’s easy to improve a portfolio’s expected returns by increasing the amount of risk it takes. The challenge, and skill, comes in enhancing a portfolio’s expected returns without taking more risk. If you’re interested in diving deeper into this topic, please contact me

“April showers bring May flowers” reminds us that even the most unpleasant of things, in this case the heavy rains of April, can bring about very enjoyable things indeed — even an abundance of flowers in May.

Well, not so fast. Here in Texas the wettest month of the two is generally May, which is also traditionally the wettest month of the year, followed closely by October. However, this year we are in a severe drought. Dallas-Ft. Worth is reporting only 3.07 inches of rainfall year-to-date while San Antonio is reporting 3.37 inches versus the average rainfall by this time each year of 5.70”.

Pray for rain!

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Have a question? Let me know! Email me at kcompton@wcmtexas.com.