Market Recap, Portfolio Analysis, And Review

By Matt Johnson, CFA® and Andy Nugent, CFA®

The first quarter continued in a positive direction as we continue to head toward some sort of normalcy and put 2020 in the rearview mirror. While most areas still require masks and restrict the number of people allowed in sporting events and restaurants, slowly but surely those limitations are being relaxed. The vaccines continue to be widely distributed, with all adults becoming eligible in just a few more days.

The second round of stimulus checks went out, which helped many who desperately needed it. This should help boost local economies and struggling small businesses, especially restaurants and entertainment. As we move forward and people become more engaged and begin to socialize more, the entire economy should benefit. This should help support corporate earnings consistency as well.

In the end, the market benefited from these positive trends, advancing over 5% in the first quarter. Interestingly, the Dow Jones Industrial Average outpaced the technology-heavy Nasdaq, which advanced less than 3%.

As mentioned last quarter, the market continued to march forward, but slowed down the pace from the more than 12% gain in the fourth quarter. While it would be terrific to advance 5% every quarter, we do not expect market growth to continue consistently at these higher levels. While historically low interest rates and additional COVID-19-related stimulus checks should help keep the equity markets testing new highs, don’t be surprised if you see a pullback should the market get ahead of itself.

The U.S. $ And Interest Rates

Interest rates remain at relatively low levels from a historical perspective. The 10-year Treasury note sits at 1.74% at quarter end. While this is low considering long-term numbers, it is up from a yield of 0.62% a year earlier, and under 1% just a quarter ago.

It seems unlikely that we would see the U.S. dollar strengthen in these current conditions. However, with U.S. interest rates relatively high compared to the rest of the world and strong economic growth, we may see higher yields followed by a stronger U.S. dollar, as we still have the strongest global economy.

A strengthening dollar is good for U.S. businesses when it comes to buying materials that are made internationally. However, for companies with global distribution of U.S. goods, prices will become more expensive for the foreign consumer. As the U.S. dollar is just starting to strengthen, it shouldn’t have a large impact on companies’ earnings, yet it is something to keep an eye on as we move through the year.

We continue to be very cautious on bond investments as new purchases will continue to have low yields, and as interest rates continue to rise, the price of existing bonds will decline. As such, when we do purchase a bond, we are focusing on short-duration instruments with the hopes of rolling that money over into higher yields in the future. We are also utilizing preferred equities as bond proxies to increase yields as dividends received are higher than bond rates and the prices are more stable than common equity.

Unemployment

2020 had wild swings in unemployment. Starting with a very low rate of 3.5% before the pandemic, we then witnessed unemployment soar to nearly 15% at its high before recovering to 6.7% by year-end. The first quarter saw continued improvement as the unemployment rate shrank to 6% at the end of the quarter. This shows that corporate America is strong, and as the reopening continues and people get back to work, we expect the unemployment number to continue to decline through 2021.

As we noted last quarter, many of those working (nearly 20%) were telecommuting. We expect this number to fall as the world tries to get back to normal and people return to work. However, some companies are likely to reduce their office footprint by having employees come to the office less often and share workstations/offices. This will result in savings on leases for these companies; but this will obviously not be good for the commercial real estate sector.

Sector Analysis

Financials

The turnaround in interest rates was very positive for this sector. While the rates are still very low, the stock market is looking ahead and has priced these companies near or higher than they were trading pre-pandemic. We continue to have no investments in financials, as we feel the prices have gotten ahead of themselves in this area. We do like the forward landscape for this sector and would consider purchasing if we see a correction that more accurately reflects the true value of these companies.

Energy

After being the worst-performing sector in 2020, Energy was the best performing sector in the first quarter of 2021. Oil prices were up over 20% as OPEC limited supply and global economic demand increased. Also, the Texas freeze caused disruptions to supply, which resulted in upward pressure in crude oil pricing.

Information Technology

Technology took a breather in the first quarter. After increasing a whopping 42% in 2020, the sector was one of the worst performers in the first quarter, but was still positive. While we continue to maintain a significant portion of our portfolio in this sector, we reduced our exposure in January as prices for a couple of names exceeded our estimate of its worth. We sold out of TE Connectivity and Baidu in the quarter. We did purchase one new tech name, Alibaba. Think Amazon for China. It has outstanding growth in revenue and earnings that we do not see stalling anytime soon.

Consumer Staples

This is an area we like and are looking to invest more. Although the quarterly returns were nearly flat, Consumer Staples advanced almost 8% in March. Value looks like it could be coming back in vogue, and this is an area where you can find it. We recently added Kellogg Company to the portfolio. It is trading at very reasonable price-to-earnings and price-to-cash flow multiples and is paying a dividend of over 3.5%. We think Kellogg offers an opportunity for significant price appreciation while paying an above-market dividend while you wait.

Healthcare

As one can imagine, healthcare has fared well overall, and we continue to believe in the sector long term. We did sell one name in the quarter; Illumina’s price spiked just before earnings, and we took that opportunity to exit the position. We continue to hold high-quality names such as Pfizer, Bristol-Myers, Walgreens, and AbbVie. In addition, we added to our position in CVS in the quarter. These companies pay above-average dividend yields and have reasonable multiples compared to the broad markets. We continue to look for opportunities in this area.

Summary

We had a strong first quarter. While technology companies took a breather, stocks with a value tilt did well. In fact, the Dow Jones recently hit record highs. As we have the flexibility to invest in growth or value, we are able to benefit from either side. However, with the markets very high, we remain very diligent in making investment decisions.

The quarter gave us reality TV with stocks like Game Stop moving from $16 to over $400. It still trades with extreme volatility and closed the quarter near $190. This is despite years of declining revenue and increasing losses on the bottom line. To people who value companies by looking at balance sheets and cash flows, it was fascinating to watch. While we are confident we know how this story will end, it is very interesting to see it unfold. For the record, we will not be buying Game Stop.

We continue to not own restaurants, airlines, cruises, etc. These “reopening” stocks have, in many cases, seen their prices soar. Now they will need to put up the numbers to support these lofty valuations or we could see their stock prices decline. Restaurants, in many cases, have advanced to levels much higher than pre-pandemic levels, which doesn’t make a whole lot of sense.

Airlines are near where they were trading pre-pandemic, yet continue to have scaled-back operations. When will the business traveler return? While business travelers will continue traveling, will they do so as often? With many becoming comfortable with Zoom or Microsoft Teams, we would expect business travelers to fly less frequently than in the past. Only time will tell, but as we are not ones to speculate, we’ll stay away until we get more clarity.

As mentioned last quarter, equity markets continue to trade at very high levels. We are still able to find what we think are good long-term investments, but it is getting more difficult.

Performance will surely rely on the ability of each company to grow income. They may stub their toe in the process, but if the markets do pull back, we will remain diligent and look to make investment decisions with your long-term financial wealth in mind.

We’re Here For You

If you have any questions about market activity, your portfolio, or anything else that’s causing you concern, we at Sage Capital Advisors are here to help. Contact us at (844) 279-7243 or by email at info@sage-cap.com to set up an appointment today.

About SAGE Capital Advisors

Sage Capital Advisors, LLC is an independent fiduciary and fee-only financial advisory firm headquartered in San Diego, California. Operating as a boutique firm since 2005, Sage Capital Advisors puts their clients’ interests first in all things and gives personalized attention so their clients can experience financial peace of mind. Providing a full range of investment and wealth management services, the Sage Capital Advisors team prioritizes integrity, due diligence, transparency, and customized strategies based on their clients’ individual situations and goals. To learn more about Sage Capital Advisors, connect with them on LinkedIn or visit their website.