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First Quarter 2021 Investment Commentary

Additional fiscal stimulus and rising vaccination levels are fueling confidence.

The U.S. economy continues to show improvement with unemployment dropping to 6%. Inflation is ticking up, reflecting growth and optimism for the future. The U.S. Federal Reserve has indicated that they expect the jump in inflation to be temporary and will continue to maintain monetary stimulus until the economy has fully recovered. Many emerging markets, particularly China, continue to grow at faster rates than developed economies since they started to exit the pandemic sooner.

Global stocks rose again in the first quarter with the U.S. surpassing international markets.

Returns were 6.3% for the broad U.S. market and 3.8% for international markets, with developed markets doing slightly better than emerging markets. We were gratified to see the turnaround in value-oriented stocks at the end of 2020 continue into the first quarter. This made up quite a bit of the gap between value and growth style performance over the last 12 months. Small and mid-sized company stocks also outperformed larger companies. As we have noted in the past, our investment approach is to broadly invest in all stocks but slightly emphasize smaller and mid-sized companies as well as stocks trading at more attractive valuations. Those two factors, small size and value, have added value during most periods, except for the last few years. We held to our research-based approach and that conviction has paid off. We expect both factors to add to performance as the economy continues to recover.

Interest rates rose in the first quarter posing challenges for bond returns.

The first quarter saw a sharp rise in intermediate interest rates with the 10-year Treasury note ending the quarter at 1.7% versus 0.9% at the end of December. This was the largest quarterly increase in rates since 2016.* The broad bond market index dropped 3.4% for the quarter. HTG managed portfolios benefited from the emphasis on shorter-term bond funds vs. intermediate-term bond funds. The rise in rates for longer maturity bonds reflects optimism surrounding the U.S. economy, according to the Federal Reserve Chairman.

Maintain discipline and avoid story stocks.

Many of us have read about some “amazing” returns for stocks hyped on social media such as GameStop and Tesla. The temptation to buy Bitcoin and other crypto currencies also continues. Some reporters have attributed this activity to stuck-at-home individuals with extra time and extra cash. History shows us that when asset prices are driven way beyond their underlying value, eventually those prices drop, often suddenly. We remain diligent in reviewing portfolios, rebalancing where appropriate to capture returns and re-investing in asset classes that may be under-valued. If you have questions about your asset allocation or a change in circumstances, please contact your advisory team. Thank you for your continued confidence in our firm.

*Reference: Wall Street Journal

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