March 2021
The economy just keeps powering ahead despite those still squeezing out the last vestiges of Covid-19 fear. Manufacturing is just red hot. February’s national ISM Manufacturing Index not only reported very strong increasing strength over January, but the level of “new orders” will power even more growth into the second quarter of this year. That was confirmed by five regional Fed manufacturing reports for March showing very strong growth over February and an explosion in “new orders”. Housing and Retail Sales took a step back in February, which we attributed to the February Freeze; year over year numbers are still very strong. Most encouraging and supportive of our view was the news on jobs. The February Jobs Report showed a much larger than estimated increase of 379,000 new jobs, with the private sector providing 465,000. Other employment indicators suggest there will be further large job gains in the coming months.
Despite the newest Democratic $1.9 trillion virus relief bill and a pending proposal for a massive infrastructure bill, the Dollar had a massive rally +1.48%, purportedly in response to rising yields on Treasuries. This resulted in significantly lower returns from all foreign equities. The oddity in the S&P 500’s remarkable 4.38% return was the abnormally large contribution from the Utility and Consumer Staple sectors which typically underperform in the face of rising rates. Through 2/28/21, the S&P 500 had been badly trailing its foreign counterparts, but March substantially erased most of that underperformance for the year to date. US Small Caps continued their year to date outperformance in March and Foreign Small Caps also maintained their year to date outperformance, despite March’s underperformance. Value also retained its outperformance over Growth for both the month and year to date.
Bonds reacted in traditional fashion to the strong economic data with the US Aggregate Bond Index down -1.15% for the month and -3.37% for the year. Likewise, Credit generally turned in positive returns for both periods.
Commodities were generally negative for the month, no doubt partially impacted by the rising Dollar. For the year to date, Oil and Industrial Metals were the leaders with Precious Metals negative.
Tactical Conservative generated a fractional positive return for the month and year to date against losses for its proxies. Overweight allocations to Credit Bonds and Emerging Market and US Small Cap Equities drove the outperformance. Tactical Moderate and Tactical Growth trailed their proxies for the month due to overweight allocations in Foreign Equities and Precious Metals. However, they maintained their relative outperformance for the year to date from overweight allocations to Foreign and US Small Cap Equities and Credit Bonds.
Tactical Income’s positive returns for the month and year to date were driven by its overweight to Credit Income Securities.
Tactical Equity trailed its proxies for the month due to the declines in its Internet Technology positions which was part of the sell- off in that sector. Also, its position in US Biotechnology was negative in reaction to the FDA’s recent decision to deny certain new drug applications which raised concerns over a return to a more restrictive posture. Finally, Copper Miners were somewhat inexplicably negative despite gains in the S&P 500 Materials sector. For the year to date, it maintained outperformance over its proxies due to over-weights in various “value” orientated sectors.
Tactical US Equity outperformed its proxies for the month and year to date due to underweights in Technology and Internet Services and the overweight in Utilities. Tactical US Equity FT outperformed from similar allocations and its Small/Mid Cap bias.
Tactical Global Balanced outperformed its proxies for the month and year to date from similar US sector allocations and overweight to Credit and Blend Bonds.
With two more states dropping their mask mandates, bringing the total to 17 states, and even the loyal holdout states increasingly forced to open their states, the clock is running out on the era of fear. Dr. Fauci did his duty for the Biden administration, giving testimony to the Senate on March 25 and other media interviews stating even the vaccinated must continue to wear masks, for all manner of reasons. Then, that narrative was upended on 3/29/21 when the CDC stated vaccinated persons can not transmit the disease and they are protected from the currently known virus variants. There is also the subtle moving of the goal posts by referring to “safely” and “safety” as opening standards; that is suggesting the standard for opening of society is no transmission of the virus; a far distance from the original “15 day pause” to protect the hospitals. Then Dr. Fauci pivoted again stating we need 85% of the US population vaccinated before we can reach herd immunity, therefore, we must maintain restrictions until then. For some reason, he refuses to factor in the percentage of the population already infected beyond the numbers officially tested positive. We warned of this potential misleading target in our 12/17/20 Special Market Commentary: The Race To Herd Immunity. If there was any doubt the Biden administration wants to maintain an aura of fear to promote massive new spend and tax programs, the following is Sen. Schumer’s response to the monster March Jobs Report issued on 4/2 showing 916,000 new jobs: “if the American Rescue Plan could lead to these numbers, imagine what the even bigger, bolder American Jobs Plan will do for our recovery?”. Even for a politician, that was a stretch to suggest a bill passed on March 11 had that immediate effect on hiring plans during the month of March.
It is clear the Biden administration will rush to push through all their programs before the 2022 mid-term elections. That will likely give an added sugar high to an already strong economy, which will likely only get stronger as the Covid-19 gets further in the rear- view mirror and out of the reach of manipulation by some politicians. Therefore, we continue to expect the financial markets to react favorably, though more discriminately as to asset class winners and losers.
The TAG and RPg strategies remain fully allocated to this strong growth outlook and to those asset classes we believe will benefit.
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Important Disclosures:
Risk Paradigm Group, LLC (RPg Asset Management or RPg) is a registered investment advisor with the U.S. Securities and Exchange Commission (SEC). Tactical Allocation Group (TAG) joined Risk Paradigm Group, LLC and became a division of the firm on July 22, 2016. Additional information regarding Risk Paradigm Group, LLC can be found on our website at www.rpgassetmanagement.com. RPg does not provide tax or legal advice. Please consult an independent tax advisor for additional guidance.
This material has been prepared solely for informational purposes and is not to be considered investment advice or a solicitation for investment. Performance provided is past performance. Past performance is not indicative of future results. Investments may increase or decrease in value and are subject to a risk of loss. As with any investment strategy, there is potential for profit as well as the possibility of loss. No representation or warranty is made that any returns indicated will be achieved. Investors should consult their financial advisor before investing.
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Sources: Bloomberg.
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