Monthly Outlook: March 2021
Stocks did well in the beginning of February but faded into the end of the month over concerns that interest rates and inflation are spiking higher. For the month, US stocks gained 2.7% and are up just 1.7%, YTD. International stocks gained 2.0% in February and are up 2.4%, YTD. But the market that has been so strong, the tech-heavy NASDAQ, lost 0.1% in February and is flat, YTD. There’s a clear rotation in the stock market from Large Growth (Tech) to Large Value (Financials & Energy). As we see so often, last year’s winners are unlikely to be this year’s winners.
Bonds were the weak market in February, losing 1.6% as interest rates (10-year US Treasury) spiked to 1.5%. Remember, the 10-year US Treasury rate was only 0.5% last August. Investors seem to be increasingly concerned that the trillions of stimulus dollars coming from both the Federal Reserve and Congress could result in some inflation this year. With another $1.9 trillion stimulus bill trying to work its way through Congress currently, inflation concerns just might be a valid concern.
Markets Go Up 74% of the Time
Our iFolios investment strategy focuses on “active allocation” and over-weighting or under-weighting each index fund in the portfolio depending on the price trend of that fund. Our strategy is rules-based and there is no guessing. We know from back-testing of our strategy for the past 40 years that stocks go up 74% of the time, using our rules. And the results of a buy signal have ranged from -2% to +37%. So, when we get a buy signal on stocks, it’s a pretty good bet that we should be fully invested for growth. On the other hand, that means that stocks trend downward 26% of the time, using our rules. The results of these sell signals are that stocks ranged from +3% to -34%. Said another way, nothing good happens when markets are in a sell signal! You can expect flat to down markets during a sell signal.
There is a point to this long narrative and here it is: In February, many markets flipped from “buy signals” to “sell signals.” New sell signals were triggered for US Large Growth, NASDAQ, Europe, Asia, Emerging Markets, and Long-term Bonds. Only US Value, US Small Cos., International Value, and Short-term Bonds remain in up-trends and buy signals. That’s a significant amount of change and explains why we sold or trimmed many of our index-fund holdings in late February. Now we wait to see if it’s merely a flattish period or the beginning of a more meaningful correction.
Optimism for the Economy and COVID Vaccines
Even though many markets just triggered Sell Signals last month, there is good news that we can focus on. COVID cases are declining rapidly and vaccines are getting distributed across the country. This will surely result in better health, most importantly, but also re-opening of the economy and a return to a “new normal.” On top of that, Congress seems likely to pass at least some amount of additional stimulus that will hopefully target those that are really hurting because of the COVID pandemic.
Some readers might be confused about how we can be both optimistic about the economy and COVID, yet getting sell signals on stocks and long-term bonds. Well, it’s just more evidence that “the market is not the economy.” Last year, you might remember that stocks rallied as COVID was running rampant and the economy was shut down. Maybe this is a case of “buy the rumor, sell the news.” Or maybe it’s a case of “stock investors are forward looking” and they see an over-heating recovery with higher inflation leading to lower earnings and rising unemployment. Either way, it’s just more evidence to us that predicting the economy is hard, and predicting the markets is even harder. This is a good example of why we developed our iFolios investment strategy that simply invests according to how markets are actually trending and not based on predictions at all.
As we move into March, we do indeed have a large Cash position, again, because of the new downtrends and sell signals. But we’ll hope that this is just a short-term pause and that we resume uptrends and growth soon. For now, it’s sensible to be cautious, yet optimistic. We’ll see.