By: Caley Perleberg, AVP Trust Portfolio Manager I, CFA

All Systems Go

Vaccinations Up, Stocks Up, Yields Up, Prices Up

With rising optimism for a strong economic reopening, the first quarter rewarded risk investors, while safe-haven assets struggled. Let’s recap:

    • It all stems from the increase in vaccinations. With the U.S. averaging almost two million shots/day by the end of the quarter, our vaccination rate is five times greater than the rest of the world
    • With the U.S. exceeding vaccine estimates, expectations for a faster and stronger re-opening took hold
    • The new Biden Administration passed a $1.9 trillion COVID relief bill aimed at helping the bottom 90% of income earners, juicing growth estimates further
      • The bottom 90% tend to spend more of their share of income than the top 10% (see chart), which should help drive demand
    • The Bond markets signaled they too believe we are poised for strong growth and with it higher inflation
    • These higher inflation expectations prompted intermediate and longer-dated yields to rise quickly and significantly. The 10-year Treasury Yield began the year at 0.93% and ended the Quarter at 1.73%
    • When yields go up, existing bond prices go down. Correspondingly, Treasury bonds had their worst quarterly performance since 1980
    • Finally, U.S. job growth exploded in March with 916K Americans finding employment. This number blew past estimates of 660K, and helped lower the unemployment rate to 6.0%

On the back of the positives discussed above, Global Stocks (as measured by the MSCI ACWI Index) were up 4.6% for the first three months of 2021. U.S. Small Cap Stocks led the way gaining 12.7%, while U.S. Large Cap stocks added 6.2%. International Developed and Emerging Stocks had nice absolute returns themselves, up 3.5% and 2.3% respectively.

Benchmark Return %
MSCI ACWI (global stocks) 4.6
S&P 500 (U.S. Large Cap Stocks) 6.2
Russell 2000 (U.S. Small Cap Stocks) 12.7
MSCI EAFE (Int’l Developed Stocks) 3.5
MSCI Emerging Markets 2.3
U.S. Bloomberg Aggregate Bond -3.4
BofA ML U.S. High Yield Bond 0.9
Bloomberg Municipal Bon -0.4
Bloomberg Commodity 6.9
Dow Jones U.S. REIT 10.0


As mentioned before, Bonds had a rough first quarter. The Bloomberg Barclays Aggregate Bond Index lost 3.4%, while Municipal Bonds were down 0.4%. High Yield Bonds fared better, up 0.9%.

Finally, after a rough 2020, Commodities and Real Estate rebounded, adding 6.9% and 10%.


Reviewing the business cycle below, the U.S and China are leading the way, while other large Developed countries are solidly in the Recovery Phase. Recoveries in Emerging Markets have varied, but they too are in the Early Recovery Phase.

Reasons for optimism:
+ The IMF recently revised their 2021 Global GDP estimate up from 5.5% to 6.0%
+ The amount of liquidity and support in the system is astounding: the Federal Reserve’s bond purchasing program is $120B/month, the aforementioned COVID relief bill is $1.9T, and a potential Infrastructure Bill (estimated at $2T) could further juice economic output
+ The Federal Reserve (FOMC) expects unemployment to fall to 4.5% by year-end
+ As shown on the left, corporate earnings are expected to rise above $180/share
+ U.S. Consumers (70% of GDP) are eager and ready to spend, armed with stronger balance sheets and rising confidence
+ The Purchasing Managers Index (manufacturing barometer) hit a 37-year high in March
+ The number of American’s vaccinated continues to grow, fueling confidence that the Services sector will finally find its footing as we return to normal

Reasons for caution:
– The biggest risk to the recovery right now is a Federal Reserve policy mistake. Consider:

o They need to thread the needle of reducing liquidity without rattling the markets (ala 2013 Taper Tantrum)
o They changed their inflation policy last year, stating they’ll allow inflation to run above their target of 2%. If inflation runs 2%+ for an extended period, when do they start raising interest rates?
o Thus, the Fed needs to balance all of this while not being too early or too late to act

– The global vaccination rollout continues to be inadequate, with many countries in lockdown. This could stymie a full global economic recovery
– If corporate earnings do not recover as quickly as hoped, market valuations will remain high/stretched compared to historical averages

Long-Term Concerns:
We have long been concerned with increasing U.S. government debt and the coronavirus pandemic only exaggerated the problem:

    • As you can see in the Congressional Budget Office (CBO) chart, Federal debt outstanding is now 100%+ of GDP, and by 2051 its projected to be over 200%
    • While annual deficit spending may go down in the years to come, the amount of interest we pay on our total debt will continue to grow
    • With major government outlays (health care, social security) increasing, discretionary spending will either need to be cut, or funded with more borrowing or higher taxes
    • Keep in mind government borrowing has been assisted by low interest rates

One of the ways President Biden is looking to fund his Infrastructure Bill is with higher corporate taxes. We undoubtedly will be tracking this as higher corporate taxes would eat into earnings.

Some of the potential hit to corporate profits (via higher taxes) could be offset by the increase in GDP from spending in the bill. The 2015 CBO chart shows estimated fiscal multiple ranges for different policies. Direct infrastructure is estimated to have a higher multiplying effect.

Asset Allocation Views

The following are the FWBT Trust Investment Committee’s asset class views:

Portfolio  Weight

Asset Class




With low yields and inflation rising, the risk of purchasing power erosion elicits underweight.



A Dovish Federal Reserve, massive Fiscal stimulus, increasing vaccinations (when compared to other countries), and eager & ready to spend consumers make us positive on the U.S. economy and Equities.

Surging COVID numbers, lockdowns and lackluster vaccine rollouts make us less rosy on International Developed Markets. We do like Emerging Markets based on their growth outlook.



We are constructive on and remain overweight Alternative Assets. We favor our Tactical Alternatives allocations, especially the recently added Natural Resources position, which tends to perform well in the current phase of the business cycle. A potential Infrastructure package could also help deliver alpha.



Underweight Fixed Income given interest rate outlook and better opportunities elsewhere. Our portfolio Duration is short relative to the benchmark with short-term rates anchored by Fed policy and longer-term rates feeling upward pressure. We remain constructive on High Yield given an improving economic backdrop.

Portfolio Allocation

Overall Allocation Attribution

Our tactical overweight to both Equities and Alternatives, and corresponding underweight to both Fixed Income and Cash, where decisions that added value to our portfolios in 1Q21. As we recapped earlier:

    • Equities and Alternatives handily outperformed Fixed Income and Cash
    • Global Stocks (MSCI ACWI) +4.6%, Bloomberg Commodity Index +6.9%, Bloomberg Aggregate Bond -3.4%

Equity Attributions

    • Our overweight to U.S. Large Cap Equities and underweight to International Developed Equities continued to generate alpha
    • S. Small-Cap Equity exposure was beneficial as they led all Equity Asset Classes for the Quarter
    • Within our Int’l Equity portfolio, our tilt to Emerging Markets slightly detracted from performance

Alternatives Attribution

    • Within the Alternatives portfolio, our newly added Natural Resources weighting proved favorable, while our Hedged Equity Strategy also performed nicely
    • Our underweight to Real Estate subtracted from performance as it was up 10%+

Fixed Income Attribution

    • Interest rate risk management is imperative in any environment, especially when rates are rising. As such, our short duration strategy generated alpha
    • With inflation expectations rising, our increase to Treasury Inflation-Protected Securities also helped client performance
    • Finally, our overweight to High Yield Bonds was favorable as High Yield outperformed our Bond benchmark by upwards of 4%

In Closing

While we touched on some long-term concerns, near-term we are very constructive given the amount of liquidity, support, and pent-up demand in the system.

We remain positive on Equities and Alternatives and less so on Fixed Income and Cash. Until proven otherwise, the “Don’t fight the Fed” mantra continues to be a winning strategy. The Federal Reserve has made it known that they are willing to do whatever it takes to support and stimulate economic growth. Pent-up consumer demand will be unleashed once vaccinations are complete, helping push corporate earnings higher. With yields at or near 0%, Cash currently offers purchasing power erosion. U.S. Treasury yields have jumped sharply due to rising inflation concerns. While the bond markets seem concerned about inflation, the Fed has made it clear that getting the unemployment rate lower is more of a priority.

The FWBT Investment Committee has made adjustments to client portfolios that have proved to be additive, and we believe they will continue to drive outperformance. If you have any questions, please reach out to your local Trust Officer or Trust Representative.


This document is for informational purposes only. They do not take into account the exceptions and other considerations that may be relevant to individual situations. The information provided should not be construed or used as legal or tax advice, which has to be addressed to particular facts and circumstances involved in any given situation. The information provided should not be interpreted or used as a specific recommendations for any client of FWBT. It is not intended as an offer or solicitation of an offer, to buy or sell any security or financial instrument, nor does the information provided constitute advice or our view as to whether an asset is appropriate for you and your financial objectives. The outlook and allocation views reflect subjective judgements and assumptions, and there can be no assurance that developments will transpire as discussed. Past performance is not a reliable indicator of future results. The opinions expressed are those of FWBT’s Investment Management Team, and FWBT shall not be held liable for any content or information contained in this piece. Investors should seek financial advice regarding the suitability of any asset or strategy discussed. Investing involves risks, including the possible loss of principal and change in value. Index performance is shown for illustrative purposes only.