Please find this month’s market updates below. This list is intentionally brief and uses ETFs that are readily available to all investors to represent the major markets. In the second section, there are five simple portfolio mixes, which are described by low-cost Vanguard ETFs. These can be used as a guide against which to compare your portfolio mix. We hope these few, but important, data points are of value to you.
– The AdvicePeriod Team
Monthly Market Review
By Nathan Sonnenberg
AdvicePeriod Chief Investment Officer
January provided a timely reminder of just how unpredictable markets can be in the short term.
After returning nearly 16% in 2020, the S&P 500 roared into the new year, rising to its peak 2.6% through January 25. When the rally ended, it was not because of the pandemic, a weak economy, or even the rampage in the U.S. Capitol early in the month. After so-called short-squeeze battles, markets changed direction, fueled by social media, forcing hedge funds to sell holdings to cover their losses. The S&P ended the month down 1.1%, creating the first monthly decline since October.
Wise investors will read the episode as one of the countless small bumps in the market’s long, upward trajectory. Big picture: The S&P is up over 100% over the past five years and nearly 200% over the past ten years.
Let’s take a closer look at January’s markets. Emerging market stocks (VWO) were the big winner, posting a 3.13% gain. U.S. stocks (VTI) ended the month down 0.33%, while developed foreign markets (VEA) fell 0.72%. U.S. bonds overall (BND) slipped by 0.86%, while municipal bonds (MUB) were a bright spot, posting a 0.34% gain.
January’s macro data were mixed. Manufacturing expanded for the eighth straight month, with the Purchasing Managers’ Index (PMI) registering 58.7%. Growth slowed from December’s reading of 60.5%; however, any PMI number above 50 represents expansion.
The labor market expanded in January, though at a disappointing pace. The U.S. added just 49,000 jobs during the month, leaving the country with nearly 10 million fewer jobs than a year ago. However, it’s an improvement from December when the labor market contracted for the first time since April, shedding 227,000 jobs. The January unemployment rate fell to 6.3% from 6.7%, in part because many Americans have left the labor force.
Looking ahead, investors are focused on President Joe Biden’s efforts to pass $1.9 trillion of economic stimulus. Democrats’ surprising sweep of two special elections in Georgia on Jan. 5 bolsters their ability to pass the bill, but compromises could be required due to their slim Senate majority.
Passing stimulus and addressing the COVID-19 pandemic are among the new administration’s immediate priorities, but Democrats are expected to take up tax legislation once the economy improves. As we noted in a recent letter to clients, Biden plans to raise taxes on corporations and individuals with more than $400,000 of annual adjusted gross income.
Meanwhile, the timeline for economic recovery remains uncertain due to the uneven vaccine rollout. It remains to be seen how many Americans do not avail themselves of the vaccine. Because of supply shortages and county-level staffing issues, fewer than two-thirds of doses that have been delivered to the states have been administered. Monitoring worrisome new variants of the virus and smoothing out the problems will be an early test for the Biden administration.
Long term, we remain optimistic about the U.S. economy and the power of our capital markets to create value and reward disciplined investors. Don’t be distracted by day-to-day market action, and avoid the temptation to make short-term bets with money you can’t afford to lose. Patiently maintaining a diversified portfolio while avoiding the financial leakage caused by high fees and taxes is the safest and surest path to long-term wealth.
Major Market Index Returns Period Ending 2/1/2021 (Annualized)
Selections include ETFs generally available to consumers. Returns are annualized and net of management fees but do not include trading and advisory fees. Return source: Morningstar. AP Disclosure
Sample Portfolio Mix Returns (Annualized)
Global portfolio mixes are Stocks/Bonds and are represented by VT/BND; returns are annualized. Vanguard funds are a net of all management fees but do not include trading and advisory fees. Return source: Morningstar. AP Disclosure
What You Pay For: The Percentage of Active Managers That Underperform Their Benchmarks
Trailing 10 Years Numbers As of June 30th, 2020 – S&P Spiva Scorecard
Percentage of US large-cap funds that underperformed their benchmarks
US large-cap benchmark:
Percentage of international funds that underperformed their benchmarks
S&P International 700
Percentage of emerging market funds that underperformed their benchmarks
Emerging Markets benchmark:
The SPIVA Scorecard is a robust, widely-referenced research piece conducted and published by S&P DJI that compares actively managed funds against their appropriate benchmarks on a semiannual basis.