Our in depth annual 2021 investment commentary and portfolio update.

For the year to date, the S&P 500 is up an impressive 15.9%. We think the odds are high that short-term rates will rise but still remain low by historical standards and also below the rate of inflation for several more years. And we expect U.S. stocks to earn an adequate excess return premium above core bonds in our medium-term “upside” scenario.

This brings us once again to the macroeconomic topic du jour: inflation. More specifically, whether the recent surge in U.S. consumer prices is transitory or a macroeconomic “regime change” to a high-inflation environment.

We see an economy reflating as it recovers from a recession, not one on the edge of a hyperinflationary spiral. We have already positioned our portfolios to offer some inflation protection. But if we see the need to further hedge against inflation, we have additional options, each of which comes with tradeoffs.

Our view continues to be that the near-term spike in U.S. consumer price inflation, which we are starting to see, will prove to be…

Clearly, it paid not to panic and get out of the markets last spring, despite the natural fear, anxiety, and uncertainty everyone was feeling at the time.

During the full month, the Russell 1000 Value Index outperformed its growth counterpart by 607 basis points, which was its best relative month of outperformance in 20 years.

The S&P 500 ended January with an uneventful loss of 1%. However, it was anything but an uneventful month.

Why have markets been so strong in the face of crises, medical, economic, and political?

We said in the first quarter that we would get through this crisis and that things would improve and recover. Financial markets recovered first, quicker than they ever have from such a deep economic hole and quicker than anyone could have hoped. Economies have made great progress too but are not back to their pre-COVID-19 levels yet and may not be for another year or two.

Many of our clients, and investors broadly, are asking this important question: How do we reconcile the recent equity market gains, particularly in the United States, with the poor state of the current economy and the weak outlook?