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Market Outlook – Q2, 2021

- May 3, 2021


“…the nationwide rollout of Covid-19 vaccines, the persistence of ultralow interest rates, and expectations for torrid economic growth have convinced America’s money managers that the stock market still has more room to rise.”

-Semi-Annual Large Money Manager Survey, Barron’s, April 25, 2021

Q1, 2021 Market Review


  • Risky assets rallied with U.S. small cap stocks (+12.7%) and midstream energy assets (+22.0%) being top performers.
  • U.S. large cap stocks, as measured by the S&P 500 Index, added 6.2% for the quarter.
  • The 12-month forward P/E ratio for the S&P 500 Index is currently 22.3x, near its highest level since 2000.
  • Midstream energy added to its strong rally at the end of 2020, rising 22% in Q1. While gasoline demand (the largest end market) is stabilizing, volumes have ranged between 15% to 18% below prior-year levels, according to the EIA.
  • Most credit markets rallied slightly as rates rosebut credit spreads narrowed. High yield bond spreads ended the quarter at 3.4%.
  • Bonds suffered their worst quarterly loss (-3.4%) since the third quarter of 1981, when they lost 4%. To put this return in perspective, there have only been three quarters in history, all in 1980 and 1981, when the Bloomberg Aggregate Bond index lost more 3%.
  • Despite concerns about what post-pandemic demand will look like, publicly-traded real estate (REITs) rose 8.8%, driving index yields down to 3.6%.
  • After strong gains in 2020, gold retreated 10.9% as real rates rose during the quarter.

Source: Bloomberg


“We won’t be preemptively taking the punchbowl away from the economy…in an effort not to let unemployment get too low… I see pockets of concern —pockets of froth. It’s not a pervasive indicator that financial conditions are frothy overall, I just don’t see that”

-Mary Daly, San Francisco Fed President, March 24, 2021



  • Growth expectations for FY21 have increased since the start of the year, now coming in at 6-7% (Bloomberg, IMF), helped by stimulus, vaccine rollout, and dramatic base effects.
  • Increased reliance on government spending and generally negative fiscal multipliers, especially in highly-indebted countries, means that longer term real (inflation-adjusted) growth will be constrained.


  • While current inflation is relatively low, long-term inflation expectations have continued to trend higher. The 10-year TIPSimplied inflation rate is currently 2.4%, a 7-year high.
  • Economic slack, persistent technology adoption and extreme debt levels will act as a damper on inflation (and bond yields), but the trend to perpetual stimulus should overcome this.
  • On balance, we expect inflation to trend higher in fits and starts (higher lows and higher highs) in coming years.


  • To date, fiscal stimulus has been more reactive (replacing lost income) than proactive (stimulus).
  • We believe policy will become increasingly proactive and supportive/ distortive for at least three reasons:
  1. Single party control of the U.S. government
  2. The de facto merging of the Fed and Treasury
  3. The Covid-19 crisis creating the political will for further government spending and bailouts

Vaccinations in the U.S.

Global Vaccinations

Covid Mortality vs. Vaccinations: Israel vs. India

Financial Conditions Are the Easiest they Have Ever Been

Quantitative Easing in Perspective


  • The Fed is monetizing (“printing”) about $120 billion per month, which translates to approximately $6 billion every weekday or $250 million every weekday hour.
  • For context, average total annual U.S. corporate tax receipts for the last three years have been approximately $220 billion (created by the Fed every two months).
  • Relative to this monetization, other high-profile assets and asset markets seem less frothy. For example, the total NFT market did around $2 billion of transaction volume in 1Q; Dogecoin is currently worth around $50 billion; and the entire U.S. SPAC market is approximately $325 billion.

Actual & Expected Inflation Are Trending Higher

Reflation Expected to Continue for Rest of 1H21, But Without Policy Governor of Higher Interest Rates

Tracking the Recovery

Retail Sales Jump, Economic Activity Improving

Breakdown of Proposed $2.3 Tn U.S. Infrastructure Spending Plan

Corporate Taxes Historically Have Had a Mixed Impact on Equity Returns and Profit Growth


“[the confetti] is getting really misconstrued, and I think it’s actually doing the opposite of what we want.”

-Madhu Muthukumar, Senior Director, Product Management, Robinhood

Equity Returns

Equity Summary



  • U.S. equity valuations are back in the top-quintile, implying muted forward long-term returns substantially below those of the last decade.
  • U.S. equity valuations are elevated relative to foreign developed and emerging equities, but growth rates are better, and the policy backdrop – including the vaccine rollout – is more supportive in the U.S.
  • Lower valuations in Europe reflect structural challenges faced by a continent that continues to get squeezed by competition from the U.S. and China.
  • We continue to favor large cap indices over small cap indices, but active small cap managers over large cap indices, reflecting a better opportunity set for active managers in the small cap space.
  • Long-term return expectations for emerging market stocks rose during the quarter (from 5.0% to 5.5%) due to a modest change in valuations, but the tactical outlook is less rosy.


  • Even net of higher fees, select investments in high quality venture capital can add value for clients that have the capacity for reduced liquidity.
  • Recent SPAC trends should create a robust exit market for 2020 and 2021 venture vintages.
  • Secondary pricing in larger deals has recovered and no longer attractive, however, opportunities still exist in smaller deals.

Source: Bloomberg

S&P 500 Already Ahead of Year-End Targets

Central Bank Balance Sheets and Global Stocks

The Fed Can Provide More Stimulus Relative to Other Central Banks

U.S. Corporations Are Sitting With Record Cash on Balance Sheets

U.S. Stocks Are Expensive by Many Measures pt. 1

U.S. Stocks Are Expensive by Many Measures pt. 2

Record Levels of Margin Debt

Value is Starting to Outperform Growth, Still Near Relative Extreme

U.S. Growth Stocks Substantially More Expensive than Value Relative to Earnings

Value Stocks Have Benefited From Rising Inflation Expectations

Reducing Risk in U.S. Large Cap Stocks

Winners vs. Losers or Redefining “Normal”?

Modest Activity Hangover in Venture, But Not Concerning Yet

IPOs vs. Bankruptcies

SPAC Announced Deals

Lack of Profits was Not an Issue for Investors in 2020

Buyout & Venture Secondaries Remain Attractive


“MMT teaches us that if we have the real resources we need—that is, if we have the building materials to fix our infrastructure, if we have people who want to become doctors, nurses, and teachers, if we can grow all the food we need—then the money can always be made available to accomplish our goals. That is the beauty of a sovereign currency.”

-Stephanie Kelton, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy

Fixed Income & Credit Returns

Fixed Income & Credit Summary



  • Short-term rates will remain low for the foreseeable future.
  • The Fed’s new, somewhat opaque approach to generating inflation adds insult to injury for fixed income investors with low-risk thresholds, substantially raising the risk of negative real yields.
  • U.S. Treasury yields may rise as a result of massive government spending, but a structural ceiling on developed market rates from demographics and debt overhang will likely not get overcome until persistent MMT-inspired stimulus via some form of ongoing Universal Basic Income (UBI).


  • Most credit markets rallied slightly as credit spreads narrowed. High yield bond spreads ended the quarter at 3.4%.
  • Bonds suffered their worst quarterly loss (-3.4%) since the third quarter of 1981, when they lost 4%. To put this return in perspective, there have only been three quarters in history, all in 1980 and 1981, when the Bloomberg Aggregate Bond index lost more 3%.
  • Private credit remains attractive given higher rates of return and heightened economic volatility creating opportunity.

Source: Bloomberg

The Market is Pricing in Low Short-Term Rates for Several Years, but an Eventual Pickup in Growth/Inflation

Long-Term U.S. Treasury Bonds Correction

Largest Percentage Change in the U.S. 10-Year Yield on Record

U.S. Treasury Cash Balance Declined After Stimulus

Fed Will Purchase More Treasuries Than Projected Issuance in Q2

Foreign Holdings of Treasuries Increased Since Last Year's Crisis

Treasury Yields May Not Protect Investors for the Loss of Purchasing Power From Even Modest Inflation

An Extra 1.5% in Credit Premium if the Fed Supports High Yield Bonds


“We have seen, over the last four or five months, what I have never seen in my career before, is lumber to move to the level it has.”

-Sheryl Palmer, CEO of Taylor Morrison Home, April 2021

Real Asset Returns

Real Assets Summary



  • The commodity bull market is well underway as recovering demand has outstripped supply. Coupled with a potential structural shift higher in inflation in the coming years, we continue to think commodities provide a better inflation hedge than most other asset classes.
  • Gold continues to trade as a proxy for real rates. If inflation picks up and bond yields do not keep pace, gold should perform well.


  • Commercial real estate is at the epicenter of redefining normal as we exit the Covid-19 crisis. Shifts in corporate headquarters, flight from urban areas and flexible work environments foster continued uncertainty.
  • Opportunities are emerging in public and private markets as some sectors (industrial, warehouse/ fulfillment) are booming and others are in deep distress (retail, entertainment, hospitality and office).


  • The energy space has shifted from oversupply to undersupply after the shock of the COVID-19 crisis.
  • According to the Energy Information Administration, U.S. oil production is currently down 13% from pre-Covid levels.
  • The midstream space has dramatically cut capex which should allow free cash flow to continue to grow, as it did in 2020

Source: Bloomberg

Inflation Case Study: Falling Housing Inventories, Rising Construction Costs Are Squeezing Prices Higher

Gold Still Viewed as an Alternative Safe Haven

Gold & Silver Miners Generating Substantial Free Cash Flow

MLPs Expected to Continue Capex Cuts, Grow FCF

Market Expectations for U.S. REITs vs. Trailing 12-Months

CRE Rental Revenues and Occupancy Rates Remain Challenged

Coastal Property Rental Revenues Continued Decline in 4Q

Rising Second Mortgages & Home Equity Withdrawals

Major Increase in Most Commodity Prices for the Past Year


“If the financial system has a defect, it is that it reflects and magnifies what we human beings are like. Money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong. Booms and busts are products, at root, of our emotional volatility.”

-Niall Ferguson, Historian & Fellow at Hoover Institution

Opportunistic Strategy Returns

Opportunistic Strategies Summary


  • The yield on a diversified portfolio of global stocks and U.S. bonds rose modestly to 1.6%, near an all-time low.
  • Near record low hurdle rate/opportunity cost of U.S. and global balanced portfolios (expected 10-year returns of 2.1% and 2.4%, respectively) and higher expected volatility are somewhat offset by higher fees.
  • Higher volatility bodes well for high-quality manager alphas, but manager selection remains crucial.


  • Despite low opportunity cost, high fees need to be considered carefully; however, the “riches are in the niches” – high quality boutique managers have the potential to add value given expected higher volatility.
  • Closed-end funds rallied (+5.5%), bringing trailing one-year returns to 43.6%. Average discounts narrowed by 2.8%, from – 7.3% to -4.5%, which is now above the long-term average of – 5.7%.
  • Other opportunistic and alternative categories showed mixed performance in Q1, with global macro and insurance-linked securities trailing a global balanced (60/40) portfolio while quity-centric strategies generally outperforming.

Source: Various, external CMAs are as of March to October 2020 and are nominal. GMO assumptions are

Institutions Join the Crypto Party

Average Closed-End Fund Discount Back Above Median


“High up on his list and sooner rather than later, will be dealing with the consequences of the biggest financial bubble in U.S. history. Why the biggest? Because it encompasses not just stocks but pretty much every other financial asset too. And for that, you may thank the Federal Reserve.”

-Richard Cookson, Bloomberg, February 4, 2021

Time to Tilt from Deflation to Inflation Assets

Expected Returns for Passive “60/40” Portfolio Near All-Time Low

Valuations in the Context of Yields

Growing Twin Deficit = Major Headwind for USD

Asset Class Returns & Volatility – Strategic Forecasts


Magnus Financial Group LLC (“Magnus”) did not produce and bears no responsibility for any part of this report whatsoever, including but not limited to any microeconomic views, inaccuracies or any errors or omissions. Research and data used in the presentation have come from third-party sources that Magnus has not independently verified presentation and the opinions expressed are not by Magnus or its employees and are current only as of the time made and are subject to change without notice.

This report may include estimates, projections or other forward-looking statements, however, due to numerous factors, actual events may differ substantially from those presented. The graphs and tables making up this report have been based on unaudited, third-party data and performance information provided to us by one or more commercial databases. Except for the historical information contained in this report, certain matters are forward looking statements or projections that are dependent upon risks and uncertainties, including but not limited to factors and considerations such as general market volatility, global economic risk, geopolitical risk, currency risk and other country-specific factors, fiscal and monetary policy, the level of interest rates, security-specific risks, and historical market segment or sector performance relationships as they relate to the business and economic cycle.

Additionally, please be aware that past performance is not a guide to the future performance of any manager or strategy, and that the performance results and historical information provided displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be inferred that these results are indicative of the future performance of any strategy, index, fund, manager or group of managers. Index benchmarks contained in this report are provided so that performance can be compared with the performance of well-known and widely recognized indices. Index results assume the re-investment of all dividends and interest and do not reflect any management fees, transaction costs or expenses.

The information provided is not intended to be, and should not be construed as, investment, legal or tax advice nor should such information contained herein be construed as a recommendation or advice to purchase or sell any security, investment, or portfolio allocation. An investor should consult with their financial advisor to determine the appropriate investment strategies and investment vehicles. Investment decisions should be made based on the investor’s specific financial needs and objectives, goals, time horizon and risk tolerance. This presentation makes no implied or express recommendations concerning the way any client’s accounts should or would be handled, as appropriate investment decisions depend upon the client’s specific investment objectives.

Investment advisory services offered through Magnus; securities offered through third party custodial relationships. More information about Magnus can be found on its Form ADV at


This report is intended solely for the use of its recipient. There is a fee associated with the access to this report and the information and materials presented herein. Re-distribution or republication of this report and its contents are prohibited. Expert use is implied.


Asset class performance was measured using the following benchmarks: U.S. Large Cap Stocks: S&P 500 TR Index; U.S. Small & Micro Cap: Russell 2000 TR Index; Intl Dev Large Cap Stocks: MSCI EAFE GR Index; Emerging & Frontier Market Stocks: MSCI Emerging Markets GR Index; U.S. Intermediate-Term Muni Bonds: Bloomberg Barclays 1-10 (1-12 Yr) Muni Bond TR Index; U.S. Intermediate-Term Bonds: Bloomberg Barclays U.S. Aggregate Bond TR Index; U.S. High Yield Bonds: Bloomberg Barclays U.S. Corporate High Yield TR Index; U.S. Bank Loans: S&P/LSTA U.S. Leveraged Loan Index; Intl Developed Bonds: Bloomberg Barclays Global Aggregate ex-U.S. Index; Emerging & Frontier Market Bonds: JPMorgan EMBI Global Diversified TR Index; U.S. REITs: MSCI U.S. REIT GR Index, Ex U.S. Real Estate Securities: S&P Global Ex-U.S. Property TR Index; Commodity Futures: Bloomberg Commodity TR Index; Midstream Energy: Alerian MLP TR Index; Gold: LBMA Gold Price, U.S. 60/40: 60% S&P 500 TR Index; 40% Bloomberg Barclays U.S. Aggregate Bond TR Index; Global 60/40: 60% MSCI ACWI GR Index; 40% Bloomberg Barclays Global Aggregate Bond TR Index.