As the new administration begins to take over and we continue to reopen from COVID-19 concerns, as vaccines find their way into more arms, LSA has implemented revisions to the following portfolios: DFA, DFA Blended, Private Client Blended , ETF and, ETF Tactical. These changes have been implemented for the NTF solutions as well for the PC Blended models. The LSA IPC has posted our 2021 Outlook presentation and video to help support the rational around the recent changes. These are the only models being updated at this time.
Posted Monday, February 15th, DFA and DFA Blended – targeted trade date – Friday, February 19th.
Posted Tuesday, February 16th, Private Client Blended – targeted trade date – Monday February 22nd.
Posted Wednesday, February 17th, ETF and ETF Tactical– targeted trade date – Tuesday, February 23rd.
*The PC Blended revisions will impact the NTF models as well.
*As a reminder, the Revision Explanation Presentation/Video will be posted in the “Portfolio News,” section on each of the platform home pages.
Economic growth is the fuel that propels stock market returns over time. The anticipation of that growth (or lack thereof) is the driver of shorter-term market movements. Let’s look at each in turn.
We’re not out of the woods yet but expectations for growth going forward are generally positive. This last economic downturn was purely a function of the pandemic and the rebound in the economy will continue as the pandemic is brought under control. It is expected that growth will continue to struggle early in the year but be more robust later as the virus abates and as we all adjust to the post-covid reality. Of course, the recovery won’t bring us immediately back to where we were in 2019 and we’ll have winners and losers as we all adapt to the new situation we find ourselves in. But in general, mainstream economists expect a continued recovery in the broader economy this year and next.
The markets have been anticipating this rebound for some time. The sizable climb from the market bottom back in March was based on expectations for an eventual end to the pandemic. This anticipation brought market valuations from a bit above normal at year end 2019 to an even higher plateau as we closed out 2020. The extremely low current interest rates are supportive of those higher valuations to some extent but even factoring in those levels equity valuations, especially in the US, seem a bit rich.
For long term investors the future looks reasonably bright. There is every expectation of a continued improvement in the economy and that improvement will translate into more jobs and higher corporate earnings over time. Those higher earnings will help the market grow into its current valuation. The implications for modest market returns over the next few years seem generally positive. After the last two surprisingly robust years incremental returns for the next couple would be not unexpected.
The path to get there may be more roundabout however. We’re likely to see volatility as bulls and bears parse the tea leaves and contemplate continued uncertainty about the shape and size of the recovery. While increasing earnings over time will help us grow into current market valuations a pullback in shares could have a similar effect. Only time will tell us the short-term trajectory of the markets over the next period but we can safely say that market volatility of some degree will certainly continue this year!
The most important antidote to portfolio volatility is diversification, especially regarding macro allocations between stocks and bonds. This is a great time to consider overall allocations in light of the recent market moves and start to posture where 2021 opportunity might exist. We’ll certainly review this throughout the year for potential volatility on the downside, if conditions don’t improve as quickly as markets hope or have already priced in. This is why the LSA IPC is making some updates to the models at this time.