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The Cornerstone Investment Commentary: 1st Quarter 2021

In a quarter which saw the U.S. and world make encouraging strides toward our lives and economies firing on all cylinders, investment markets again proved the value of diversification when uncertainties exist.

Entering 2021, with economies expanding and interest rates so low, we maintained higher-than-normal equity positions since, with nowhere for rates to go but up (which they did), bond prices had nowhere to go but down (which they did).  Our strong emphasis on short-term fixed income served us well as the overall bond market fell over 4%(!), a result we largely avoided.  In March, we shifted some fixed income holdings from U.S. Government bonds (SCHR) to high-grade corporate bonds (VCSH) in light of the strengthening economy.  (We had mentioned this change in our January Investment Commentary.)

Inflation, excluding energy prices, continues to run well below 2%.  This is not surprising since much of the ‘stimulus checks’ are being saved or used to pay down debt, rather than being spent.  And because the unemployment rate is still about double its pre-pandemic level, it will be difficult for sustained inflation to take hold without strong wage increases.  Rises in commodity prices, which we are seeing, have never been sufficient to spark sustained overall inflation.  This helps to explain gold’s 10% decline so far in 2021.

Since the economy shrank ‘only’ 2.3% in 2020 (versus its norm of 2-3% growth above inflation), it’s also not surprising that interest rates are back to pre-pandemic levels thanks to various economic rescue steps by Congress and the Federal Reserve.  By year-end, growth should be nearly back to its previous path.

From April – September 2020, growth stocks led stock market results.  In the fourth quarter, small-cap and foreign stocks fueled strong returns.  Thus far in 2021, U.S. and foreign value stocks have shined brightest; and as in 2020, U.S. equities (which we strongly emphasize) are again outpacing foreign stocks.  It is these strategies and diversification that produced such solid 2021 results.  Finally, we migrated your holdings in the top-performing Oakmark Fund to its lower-cost institutional share class, OAYMX, earlier this quarter.

Looking ahead, economic growth should fuel corporate profit gains – always good news for stocks.  And once interest rates stabilize as expected, it should particularly benefit growth stocks.  This is why we believe your current allocation remains appropriate.  And should the virus flare again and slow down the recovery, your short-term U.S Government bond holdings are there to provide stability as they did one year ago.

Of course, we will be watching how markets react to all the various economic events that unfold this year, mindful that – as in 2020 – the path is far from certain.  With hopes and wishes for your health and well-being as Spring unfolds, we thank you for the continuing opportunity to work with you.