In the first quarter of 2021, the resilient equity markets continued their march higher, as investors’ optimism grew in light of continued fiscal and monetary stimulus, as well as an improved vaccine environment. The first quarter returns of major indices were approximately as follows:

S&P 500: +6%
Russell 2000 (Small cap US Stocks): +13%
MSCI ACWI Ex-US (International Stocks): +3.5%
Barclay’s Aggregate Bond: -3.5%

In hearing conversations that our advisors are having with clients, a common theme circles around the sustainability of the past twelve months’ market growth. In an attempt to provide perspective, below is a deeper dive into current economic and monetary policy that is impacting the markets.

As mentioned above and in past newsletters, policy officials responded to the 2020 economic contraction with unprecedented support, in many ways performing an admirable job. Looking ahead, however, it is my estimation that the key variable in determining the duration of the economic growth will be inflation.

The Federal Reserve has a dual mandate to pursue (1) maximum sustainable employment and (2) price stability. To date, the Fed has been able to release it’s full arsenal of tools towards mandate (1), without mandate (2) being jeopardized.

Nonetheless, inflation expectations have risen dramatically in the past year – the 5-year Breakeven Inflation Rate has climbed from 0.49% on March 31st, 2020, to 2.52% at the present. If inflation is moderate and transient, the Fed and fiscal policymakers will be able to keep their feet on the gas; if inflation rises too rapidly and is persistent, there may be a difficult choice between the two mandates.

In conclusion, by providing this deeper context, it is my intent to stimulate helpful conversations between clients and the advisor team at IEM, regarding investors’ asset allocation, risk tolerance, and meeting one’s financial planning goals.

I wish all a wonderful Spring and be well!

Daniel Schoenecker, CFA, MBA
Chief Financial Officer

Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The MSCI ACWX Index is a float-adjusted market capitalization index designed to track the investment results of an index composed of large and mid-capitalization non-U.S. equities. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index .  The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities.