Fiscal Stimulus, Return to Normalcy Dominate
Q1 Investor Letter
The continuation of accommodative monetary policy together with renewed fiscal stimulus and the acceleration of the U.S. Covid 19 vaccine rollout propelled the equity markets to new highs during the quarter ending March 31, 2021, momentum which has continued in the Q2 to date.
Specifically, the S&P 500® rose 6.2% in the Q1 followed by a month to date increase of 5.5% through April 28th. The sector rotation which we noted at year end also continued with upside participation across a broad swathe of industry groups, and a healthy broadening of market participation. Best performers during the quarter were those segments of the economy likely to rebound with a return to normalcy and those expected to benefit from newly proposed infrastructure initiatives. So, it was the more cyclical semiconductor portion of Roanoke’s technology exposure together with consumer discretionary, communications services, industrial and financial names that drove better than market performance in both our aggressive growth and more conservative growth and income portfolios.
One of the aspects of the Covid economy and the Covid market experience has been to emphasize the increasing and inextricable role technology plays in our work and home lives. Digital transformation is a theme we identified as an important driver some time ago and we believe we remain in the early stages of a profound, economy-wide transformation. So, while it was portfolio diversification more than a single industry group that was responsible for besting the benchmark in the first quarter, we remain overweight information technology across our portfolios.
The breathtaking recovery in the equity markets over the last twelve months has been nothing short of historic. In fact, the rebound in the S&P500® Index stands as the fastest on record while the retracing to new highs in the NASDAQ has been the sharpest in nearly 30 years. As a result, valuations are above historical averages with the S&P 500® trading at 20X projected 2022 earnings, representing an earnings yield of 5%.
At the same time, interest rates, while having risen from the mid-2020 lows, remain below 2%, making fixed income a poor alternative to equities and suggesting that valuations are reasonable compared to the earnings yield of the equity markets. Prospects for 4-6 quarters of above-trendline earnings growth, further supports our constructive view. The combination of accommodative monetary policy, renewed stimulus payments including nearly $3 trillion in proposed infrastructure spending, pent-up demand as the economy reopens and record high savings and consumer confidence, promises to fuel strong economic growth across the board. This solid momentum, in our view, will support continued market gains with an expected range in the S&P 500® Index of 4500 - 4900 over the next 12-18 months representing 18% upside from the March 31st close.
Our bullish perspective notwithstanding, we are monitoring inflation trends carefully - many commodity prices have already risen sharply, and several consumer products companies have signaled their intention to raise prices accordingly. However, wage inflation remains subdued and, in our view, is likely to remain so as technological innovation drives increased productivity and the labor force participation rate remains well below peak levels, suggesting slack in the labor market, despite headline focus on near-term trends.