US Stocks
April was another solid month for equity investors. Through the 27th, The S&P 500 rose 5% to close fractions below an all-time high while small-cap stocks were also up nicely. Looking across the eleven sectors, Technology stocks and, perhaps surprisingly, the Real Estate sector led the march higher with 7-8% gains while Consumer Staples and Energy equities were the laggards. Maybe investors see Real Estate as the place to be for the best post-COVID recovery play.
US Stock Market Returns (April 1-27)[i]
What’s old is new again when digging into what sectors posted the biggest April winners. Big cap tech-related companies surged, with investors flocking to some of the same names that worked coming out of the COVID crash a year ago. Apple, Amazon, Google, and Microsoft were all up about 10% for the month through Tuesday’s closing bell. Considering those are the largest stocks by market capitalization, it’s no surprise the indexes performed so well.
International Stocks
Overseas, returns were not as spectacular, but they were positive, nonetheless. Still concerning COVID-19 cases and supply chain shortages in emerging economies pressured non-US markets. A weaker US Dollar and higher commodity prices were features of last month, and these movements typically boost returns of foreign markets relative to US stocks, but that was not the case in April. The developed market outside of the US rose 3% while emerging markets equities climbed 4%.
Fixed Income
All eyes were on what the US 10-year Treasury yield was up to, given its massive climb from 0.4% last summer to 1.75% in late March. You may have noticed mortgage rates ticking higher if you are on the prowl for a new home. The 10-year backed off to 1.62% by late last month.
US 10-Year Treasury Yield Year-to-Date[ii]
We have good news – the latest weekly survey of mortgage rates shows that the average 30-year fixed-rate loan has dropped back below 3% after rising above it in early April. US interest rates generally declined throughout the month, but inflation fears remain.
There’s a market for everything these days, and traders expect inflation to average 2.5% over the coming five years. All of that free money floating around the system from the various stimulus and relief packages post-COVID will have their cost. Speaking of inflation, we already see it in some niche commodity markets.
Commodities
Have you seen what’s happening with lumber prices? We feel obligated to say they are “through the roof” as housing demand is intense amid a supply-constrained market. A year ago, this product was trading near $250; it’s approaching $1500 today. Eat your heart out, Bitcoin and Dogecoin!
Lumber Prices Surging (2-Year Chart)[iii]
Housing Market
So what exactly is going on in the housing market to cause lumber futures to skyrocket and the prices of new and existing homes to break records? Several drivers are at play.
- The migration from big cities to suburban America due to the pandemic indeed launched the price rise
- The Fed’s low-interest rate and easy money policy added fuel to the fire.
- We now have significant constraints with many building companies and manufacturers throughout the supply chain reducing work activity over the last 14 months due to COVID
- Demographics – millennials are reaching their peak income and family formation years, so there is fundamental long-term demand
- Taking it back even further, the 2008 Great Financial Crisis forced many home developers out of business, and some never returned.
It’s a perfect storm! House prices are up 12.2% over the last year, according to the latest FHFA House Price Index report issued Tuesday last week. It’s the strongest growth rate in 7 years. Another metric shows home prices rising at the fastest clip since 2006!
Young families are now challenged if they are first-time home buyers. The saving grace is that borrowing costs are still very low and incomes are rather good, so the Affordability Index of the housing market actually suggests homes today are more affordable than what some of our elder clients might recall during the early 1980s when interest rates were above 10%.
It has also been fascinating to see what’s happening with companies like Home Depot and Lowes. With many families stuck at the house over the last 14 months, homeowners have gotten the itch to spruce things up. Renovations, new furniture, and even pet spending are categories seeing a massive uptick versus the same time two years ago.
Crypto
Turning away from a stable long-term investment like your house to something just slightly more volatile and speculative – cryptocurrencies. It’s what everyone and their brother-in-law are talking about. Although we must say, the chatter has cooled somewhat in the last several days as the price of Bitcoin retreated from $65,000 to briefly under $50,000. It’s funny how falling prices will hush some people up.
Still, what a year it has been for Bitcoin, Ethereum, and the craziest of all – Dogecoin. Bitcoin is up 90% in 2021, but was actually down 8% during April through last Wednesday morning. Dogecoin remarkably hit a value of $60 billion; that’s $10 billion more than Ford Motor Company. It has since pulled back to be worth $43 billion—what a world.
Bitcoin Year-to-Date
We discussed the latest virtual currency market actions and what it means for us as long-term investors in the latest Weekly Happenings.
Bubble?
Let’s stay focused on your long-term investment plan. Some folks on CNBC and in the WSJ suggest the stock market is in a bubble given how high the P/E ratio and other valuation metrics are. It’s a legit concern, but the fact that markets have risen so much during the last 13 months should not distract us from being long-term investors. Stocks can always fall hard – it’s just part of being an investor. Keeping the proper perspective is essential – read on.
Imagine buying the S&P 500 in 1988 for maybe 20% more than it was worth. Would you care today? Probably not because it would have meant buying it at 350 instead of 290. Big whoop. The S&P is now close to 4200 (and you would have received dividends along the way), so buying at a high point decades ago hardly shows up on a performance statement today.
The point is that while the short-term can be scary, it’s likely that over the long haul, you are better off being in the market versus trying to get cute and pick the best entry time.
Take a look at this chart from Bank of America Global Research showing how your chance of earning negative returns in the US stock market declines over time. For example, for a random day, you have a 46% chance of stomaching a loss. Ouch – that hurts, considering we as humans hate losses more than we like gains. Go out ten years, though, and your chance of having a negative return is just 6%. The market rewards the patient investor.
The Patient Investor is Rewarded – Chance of Loss Declines Over Time
Conclusion
“This too shall pass” – it’s an old idiom among traders that always rings true. April was yet another stellar month for stocks, but it won’t last. And that’s ok. There are always humps and bumps in the road for a long-term and disciplined investor. The May through October period is notorious for weaker equity market performances, but that also means it can be an excellent time to be buying shares.
Your life is not a number on a spreadsheet – so much more matters. We are here to help you reach your financial goals so you can live your life with confidence and peace of mind.
Enjoy springtime in Michigan (hopefully no more snow), and we’ll talk soon!
[i] https://stockcharts.com/freecharts/perf.php?$SPX,$COMPQ,$INDU,IWM&p=1&O=111010
[ii] https://schrts.co/ficpJMmy
[iii] https://www.tradingview.com/chart/J6yMUwpJ/