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Equity markets have gotten off to a strong start in 2021, reaching record highs as the U.S. economy continues to recover from the pandemic. Stocks benefited from ongoing vaccination efforts as well as from government stimulus money being distributed to individuals, businesses, and local governments. The bond market, which benefited last year as interest rates dropped to near zero as the economy slowed, declined as interest rates rebounded with the improving economy.

We are in a very interesting time right now. The U.S. economy is recovering, but it is not an equal recovery across the board. Lower wage industries, who bore the brunt of the economic slowdown last year, have been much slower to recover. Likewise, minority and female employment remains more depressed and slower to recover. As of now, the economic recovery continues to be dependent on fiscal and monetary support. We need to see a broader recovery to allow economic growth without the use of government help.

If you are like most people we know, you are very glad to be reaching the end of this year. During the past year we have experienced a global pandemic, massive social unrest, a contentious political atmosphere, an economic recession, the largest quarterly drop in GDP in history, and an end to the longest running bull market in American history. While there is no guarantee that things will be better in the upcoming year, sometimes the expectation of better times, along with an effective vaccine against Covid, can lead to better outcomes. The U.S. stock market defied the carnage of 2020 by rebounding after the lockdown, helped by the largest post-election rally since 1932. Bonds also posted gains as interest rates plummeted due to severe economic contraction. It was a very strange year indeed.

The Covid-19 pandemic continues to be the dominate news maker in the U.S. and around the globe. Equity markets rise and fall with positive or negative vaccine news, or news of a spike or reduction in cases and deaths. Most medical experts agree that even with the successful development of a vaccine we are still likely a year away from mass vaccinations, and that’s assuming people are willing to get vaccinated. Polling suggests that up to one half of Americans indicate they will not take the vaccine, ultimately delaying a complete economic recovery. During the third quarter, stocks rose and are now positive for the year, although they experienced a sell off in September as worries grew of lingering economic problems. Bonds were also positive during the third quarter, adding to their gains year to date.

After a dismal first quarter for global stock markets, the second quarter was a welcome reprieve. Equity markets staged a fierce rally during the second quarter as investors bet on a quick resolution to the Covid-19 pandemic. However, stocks returned to selling pressure the past two weeks as cases have begun to spike across the U.S., leading to fears that the economic recovery will not be as smooth as many hoped. The unpredictable nature of Covid-19 makes forecasting very difficult and it is likely that a true recovery will not be seen until a vaccine is readily available. When the economy does recover, many industries will be forever changed and will be faced with a new normal.

Since our last letter to you at the end of December, the world has changed with breathtaking speed. As the COVID-19 pandemic has raced around the world, economies have ground to a halt, equities markets have plunged, lockdowns have become the new normal, and everyone’s lives have changed dramatically. From our perspective as money managers, you really could not imagine a more disruptive event. When we experience disruptive events like this, we always look for similar events in the past to get an idea of what it might look like. For this pandemic, there are really no parallels. We have basically shut down our economy for a sustained period of time. That’s never been done before. Adding to the economic shock is the collapse in oil prices, which, if not for the pandemic, would be the major news event so far in 2020. We normally do not like words such as “Plummet”, “Plunge”, and “Crash”, but all three seem appropriate for describing the markets and the economy this quarter.

After a difficult year in 2018 for both stocks and bonds, the U.S. capital markets roared back in 2019 with strong gains across the board. The bond market posted gains as interest rates dropped throughout the year. Stock indices in the U.S. are near record territory, recovering from last year’s losses and extending the bull market run that started in 2009.

The stock market continued its volatile ways during the second quarter, finishing with small gains for the quarter. The bond market had a strong quarter as interest rates fell in response to slowing economic growth. It is also notable that the Federal Reserve cut the Fed Funds Rate during the third quarter for the first time in more than a decade. The U.S. economy is being impacted by slowing global growth and domestic trade policy.

After a strong first quarter, global stock markets gave us increased volatility during the second quarter before finishing the quarter with solid gains. Stocks were strong in April, suffered a large sell off in May, and rebounded once again in June. Bonds were much more stable, following up a good first quarter with more gains during the second quarter. Mixed economic data and heightened trade fears left investors unsure of where the economy is headed, which increased volatility.

It was difficult to make money in 2018. The equity markets experienced their worst year since 2008, and had their worst December performance since 1931, despite a furious rally the last week. The bond market, facing rising interest rates all year, was negative most of the year until a December rally left it even for the year. Global stocks fared worse that U.S. stocks as questions about world wide economic growth rates hung over markets around the world.

During the third quarter, the current bull market in U.S. stocks became the longest running bull market in our history. Beginning on April 10th of 2009, the S&P 500 has gained 430%. During that time, it has also experienced eleven drops of at least 5%, and five corrections of at least 10%. Bull markets end with a drop of at least 20%, when we enter bear market territory. This has been a very resilient bull. Meanwhile, in the bond market, rising interest rates have led to falling bond prices throughout the year.