Q1 2021 Market Overview
Market Recap
“Rotation” is a fitting word to embody the start of 2021. As the year began, global markets focused on the efficiency of the vaccine rollout and signs that the global economic recovery was gaining momentum. Market leadership changed, and capital began rotating from traditional growth sectors, such as Information Technology (+1.7%) and Consumer Discretionary (+2.9%), to more value oriented or cyclical sectors of Energy (+29%) and Financials (+15%).[1] Despite the largest outperformance by Value over Growth since 2001, the S&P 500 finished the quarter up a respectable 6.17%.[2] Small-caps continued to dominate the early cycle recovery, rising 12.7% as measured by the Russell 2000 Index.[3]
The quarter concluded with the passing of the highly telegraphed $1.9 trillion American Rescue Plan, which will undoubtedly turbocharge the US recovery. On the heels of the CARES Act and December relief package, the mountain of liquidity, soaring personal savings, and pent-up demand will all need to find a home. Given the added fiscal stimulus, Ned Davis Research has boosted their projection for US real GDP to 6.5%-7.0% for 2021. If realized, this will be the fastest pace of growth for the U.S. since 1984!
The other noteworthy market development during the quarter was the rapid rise of long-term interest rates. Specifically, the bellwether 10-year U.S. Treasury, which rose from .92% to 1.75% over the course of the quarter. The result was the worst quarter for the Treasury market in over 40 years![4] While some view the relative size of the rate move as unsettling, for now, interest rates appear to be rising for the right reasons– improving vaccine rollout, accelerating economic and corporate earnings growth, more fiscal stimulus, and increased investor confidence. Despite the rate rise, the Federal Reserve appears content to reaffirm its dovish posture with short-term rates expected to hover near zero through 2023. So, a strong 2021 recovery may push rates higher, but monetary policy and foreign buyers will likely keep rates low and relatively range bound. Historically low interest rates remain a positive for long duration risk assets, such as equities.
Since early last fall, our asset allocation framework has painted a decidedly positive market environment for equities. Therefore, we continue to favor an early-cycle, risk-on posture relative to our strategic benchmarks with a tactical overweight to the U.S., small-caps, and emerging market equities. We are underweight traditional fixed income with emphasis on flexible and opportunistic bond strategies. Until the data and evidence change course, we expect a tailwind for risk assets as the global economic reopening takes shape and the “new future” unfolds.
Manager Spotlight: Why Process Matters
During Q1 the markets were shocked to learn the story of Archegos Capital Management, a Family Office with highly levered positions across Global Tech and Media companies. A notable holding of Archegos was ViacomCBS (“VIAC”), a position shared with one of our investments, Shapiro Equity Opportunities Fund (SHXYX). Naturally, we were concerned to learn that VIAC was caught up in this mess, because at one-point VIAC was a 5% position in the Fund. However, we were thrilled to learn that Shapiro’s process, specifically their value discipline, had them out of the stock well before the price dropped. This is an excellent reminder of why process matters, so let us review how Shapiro capitalized on this opportunity.
In Q1, VIAC share prices surged, with the stock rising from the $30s in January to over $100 on March 22nd. We now know much of this surge can be attributed to demand from one very large, levered purchaser. As shares of VIAC stock approached and surpassed Shapiro’s estimate of fair value, the team used the opportunity to trim their position and reinvest their gains into other opportunities (e.g. Disney, Lionsgate). Ultimately, they liquidated their entire position during Q1, with a final sale occurring in the mid $90s. On March 23rd, ViacomCBS management decided to capitalize on their frothy valuation and issued shares in a secondary offering. This decision led to the now infamous unwinding of highly levered positions across Wall Street Banks tied to Archegos. All told, the flurry of selling sent share prices sliding from over $100 to $45, which wiped out $30B of market cap in eight trading days.
Examples like these are a sobering reminder of why process matters. As bottom-up investors, Shapiro develops a unique estimate of a company’s intrinsic share value by analyzing financial statements and management team quality, while leveraging their 30+ years of investment experience. At any point, the market may hold a different opinion of a business’s value, as was the case here with VIAC. When the market rewards a stock with an over-valued share price, we expect our strategies to harvest those investments. Hats off to the team at Shapiro; they participated in almost all of the upside and none of the downside, which contributed to the Fund’s 16.6% return for Q1.[1] If it were not for Shapiro’s disciplined process, we may have ridden the elevator back down after VIAC’s precipitous rally.
[1] Ned Davis Research
[2] Morningstar Direct
[3] Morningstar Direct
[4] ICE Indices
Disclosures:
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Economic factors, market conditions and investment strategies will affect the performance of any portfolio, and there are no assurances that it will match or outperform any benchmark. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss.
New World Advisors, LLC ("New World") is a Registered Investment Advisor ("RIA") with the U.S. Securities and Exchange Commission (“SEC”). New World provides investment advisory and related services to clients nationally. New World will maintain all applicable notice filings, registrations and licenses as required by the SEC and various state regulators in which New World conducts business. New World renders individualized responses to persons in a particular state only after complying with all regulatory requirements or pursuant to an applicable state exemption or exclusion.