Second Quarter Update - April 2021
There was recently a story on NPR about a simultaneous oversupply and shortage for N95 masks. NPR interviewed a businessman who runs a medical supplies company with approximately 15 million masks in their warehouse in Miami. He’s had to lay off about 25% of his 2,000 employees because he can’t find buyers for his masks. NPR also interviewed an administrator with a mid-sized medical system. She described her company’s inability to acquire the necessary protective equipment for their doctors, nurses and staff. Connecting these two parties should be easy, shouldn’t it?
A crucial element of free markets is the ability of the buyer and seller to have a shared, stable medium of exchange and both parties need to operate in good faith. During much of the pandemic there have been profiteers and swindlers who seem legitimate on the cover then would not deliver PPE materials or other services, but still would require payment upon the order. And for those that did deliver, their cost was exorbitant. So, many hospitals paid too much for too little during the beginning and mid period of the pandemic. Now many don’t have the money to buy additional equipment.
This is an excellent example of the challenges free markets face when conditions are strained due to external shocks. Our system in the United States is one of the most efficient markets in the world…as long as the conditions function normally. To some degree the recent Texas energy bust is another example of a system that seems to be optimal until it isn’t. Once extreme factors influence supply and demand then the increased price skyrockets because supply is limited (the cold severely reduced the supply their facilities could provide as much of it was frozen).
We also see this in housing. Today’s Idaho Statesman has an article titled “Low supply drives Treasure Valley real estate.” The local Boise housing market is one of the hottest in the country. Why? I know from reading news articles from around the country that this is not just in Boise. Again, COVID has created a temporary situation that will disappear as vaccines are given and social conditions return to normal. How quickly will this occur and what will be to longer-term impact? I’m not sure but the current meteoric rise in housing prices cannot continue.
Let’s look at how the markets have performed during these unusual conditions, as well as more long-term:
Returns year-to-date (YTD) have seen extreme differences in some areas of the markets. Consider the 1-year returns for the S&P 500 (large U.S companies) and Russell 2000 (smaller U.S. companies). The S&P 500 return was 53.71% and Russell 2000 was 97.05%. In the last 3 months the S&P was only up 5.77% but the Russell had a huge gain of 21.17%. Holy Toledo!! 21.17% in three months; why the heck don’t we invest all of our money into the Russell 2000? Well, even though the Russell had a huge gain over the past 3 months it still underperformed the S&P 500 over the 3-, 5-, and 10-year periods. The variance in returns from year-to-year is usually unexpected and the magnitude is also unpredictable. This is partly why we diversify.
Bond returns, as measured via the Barclays US aggregate index, have had a rough time recently and over the last year. Because yields have been near historical lows any uptick in yields means that the value of current bond and bond funds will decline. Since the yield has been increasing over the past 3 months, returns have declined. In the last 3 months the bond index declined by -3.37%. We suspect this trend may continue as the economy recovers from the pandemic slowdown.
This quarters overview is not all bad news. This country and soon much of the world will have vaccines available to those who want them and the weird imbalances in real estate, protective medical gear, and others not mentioned in this commentary will begin to balance supply and demand, and thus volatility should lessen. Yes, the world is in a weird place, but our systems continue to provide incentives for solutions.
The Berkeley, Inc. Team
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