March 31 2021 Portfolio Results and Market Commentary

BVA Value Momentum Portfolio Strategy

Year-to-Date Performance as of March 31, 2021

Year-to-date, the BVA Value Momentum Portfolio Strategy return is up 58.75% compared to a gain of 5.64% for the Morningstar US Market Index.

Since the start of the portfolio on January 2, 2019, the BVA Value Momentum Portfolio Strategy return is up 278.57% compared to an increase of 23.83% for the Morningstar US Market Index.

During March 2021, the entire 58.75% year-to-date portfolio gain was locked in due to declining price momentum. Proceeds were entirely reinvested in 1 to 3 Month US Treasury Bills. Going forward, money will be reinvested on a selective basis as opportunities are presented.

Performance as of March 31, 2021

The Following ETF Lists Are Not Part of the BVA Value Momentum Portfolio Strategy And Are Shown For Informational Purposes Only

US Stock Market ETFs

Across investment styles year-to-date the top three performing ETFs were IWN iShares Russell 2000 Small Cap Value up 20.81%, IWS iShares Russell Mid-Cao Value up 13.52% and IVE iShares S&P 500 Large Value up 11.41%. The bottom three performing ETFs were IWP iShares Russell Mid-Cap Growth down 2.30%, QQQ Invesco Large Growth up 0.31% and IVW iShares S&P 500 Large Growth up 0.95%.

The clear story is that Value stocks outperformed Growth stocks in the first quarter, across US investment style categories.

US Sector ETFs

Across US Sectors year-to-date the top three performing ETFs were XLE Energy Select Energy SPDR up 31.74%, XLF Financial Select Sector SPDR up 16.94% and XLI Industrial Select Sector SPDR up 11.88%. The bottom three performing ETFs were XLK Technology Select Sector SPDR up 0.75%, XLP Consumer Staples Select Sector SPDR up 2.14%, and XLU Utilities Select Sector SPDR up 2.15%.

International ETFs

Across International ETFs year-to-date the top three performing ETFs were EZA iShares MSCI South Africa up 11.59%, KSA iShares MSCI Saudi Arabia up 11.51% and EWN iShares MSCI Netherlands up 10.98%.The bottom three performing ETFs were TUR iShares MSCI Turkey down 14.42%, EWZ iShares MSCI Brazil down 11.56% and ILF iShares Latin America 40 down 6.92%.

Commodity ETFs

Across Commodity ETFs year-to-date the top three performing ETFs were BDRY Breakwave Dry Bulk Shipping ETF up 119.71%, UGA United States Gasoline up 32.68%, and USO United States Oil up 25.10%.  The bottom three performing ETFs were IAU iShares Gold Trust down 11.25%, SLV iShares Silver Trust down 10.10% and NIB iPath Bloomberg Cocoa down 6.37%.

Currency ETFs

Across Currency ETFs year-to-date the top three performing ETFs were GBTC Grayscale Bitcoin Trust up 58.81%, EUFX ProShares Short Euro up 5.11%, and UUP Invesco DB US Dollar Bullish up 3.71%.The bottom three performing ETFs were FXY Invesco Currency Shares Japanese Yen down 6.57%, FXF Invesco Currency Shares Swiss Franc down 6.37%. and FXE Invesco Currency Shares Euro Currency down 4.29%.

Bond ETFs

Across Bond ETFs year-to-date the top three performing ETFs were HYD VanEck Vectors High Yield Muni ETF up 1.43%, HYG iShares iBoxx $ High Yield Corporate Bond up 0.10% and FLOT iShares Floating Rate Bond up 0.22%. The bottom three performing ETFs were ZROZ PIMCO 25+ Year Zero Coupon US Treasury ETF down 18.67%, TLT iShares 20+ Year Treasury Bond ETF down 13.44% and BWX SPDR Bloomberg Barclays International Treasury Bond ETF down 6.34%.

Market Outlook

Based on the intrinsic value of  stocks  in North America, it is estimated the broad equity market is approximately 3% overvalued. Some undervaluation remains, but opportunities are shrinking. Across North American, only 14% of stocks had 4 (second highest) or 5 (highest) star ratings compared with 18% at the end of 2020. Just one year ago, 67% were rated 4 or 5 stars as markets overreacted in the early throes of the pandemic. Since the beginning of 2005, only 20% of the time have we had as low of a percentage of stocks that we rated as undervalued. By sector, energy remains the most undervalued by far, followed by utilities and communications. In the Morningstar Style Box, both the large- and small-cap value categories are modestly undervalued.

• Even after incorporating an increased expectation for a strong economic resurgence in 2021 and for that momentum to carry into 2022, the broad U.S. equity market is 3% overvalued.
• Last quarter, energy was significantly undervalued. Energy stocks have surged quarter to date, but at a price/fair value of 0.82, the sector remains undervalued. Value stocks outperformed in the first quarter, but remain slightly undervalued; however, small-cap stocks are now slightly overvalued following their outperformance this year. 

Last quarter, several overvalued mega-cap stocks were skewing the market valuation higher. Of the 12 largest overvalued mega-cap stocks, eight declined this quarter. The combination of declining prices in these stocks and increases to estimated fair values have brought the market much closer to fair value. Many of the fair value estimates were lifted to account for the increase in the economic outlook for 2021 and 2022 and to incorporate stronger earnings expectations. Last quarter, value stocks were significantly undervalued at the end of 2020 compared with the rest of the market and small cap stocks were cheaper than large- and mid-cap stocks. After outperforming this quarter, value stocks are only 3% undervalued and small-cap stocks are now 5% overvalued. 

After lagging growth stocks for the past few years, value stocks finally outperformed. Through March 26, the Morningstar US Value Index surged 13.39% compared with the US Growth Index, which declined by 0.53%. Overall, value stocks generated the most gains, as the broad US Market Index rose 5.98%. Similarly, small-cap stocks, which were left behind in 2020 as investors were concerned about their ability to survive the pandemic, outpaced large-cap stocks. The US Small Cap Index rose 11.87% so far this year, whereas large-cap stocks increased only 4.68% and mid-cap stocks rose 8.28%.

The broad U.S. market is overvalued by about 3%. Expections are that value stocks will outperform core and growth over the long run. Value stocks should benefit from the strong economic resurgence in 2021 and 2022. But following the strong outperformance in the first quarter, small-cap stocks are np longer expected to outperform. Comparatively, large-cap stocks are less overvalued than mid- and small-cap stocks. 

Even after it surged 34.71%, there appears to be value in the energy sector. At a price/fair value of 0.82, it remains the most undervalued by far. In other sectors, utilities and communications are slightly undervalued. After significant underperformance and incorporating some fair value increases, the technology sector is no longer as overvalued as it was at the end of last year. The most overvalued sectors are the two most economically sensitive, basic materials and industrials, where  investors may be extrapolating near-term growth expectations too far ahead.

Economic Outlook

The U.S. economic recovery paused at the end of 2020, as a third wave of the coronavirus pandemic caused a retreat from the return to normal activity. However, the recovery is now restarting thanks to a receding of the pandemic plus massive fiscal stimulus. Current projected U.S. real GDP growth is 5.3% in 2021 and 4% growth in 2022.

Normalization of behavior following mass vaccination will mean a snap-back of consumer services, driving an overall GDP recovery. The job market should recover in tandem with consumer services, as the sector accounts for most of the lost jobs during the recession. Households and firms alike are in good shape on average thanks to record stimulus in 2020, with the U.S. federal deficit reaching its highest level outside of World War II. And, another massive stimulus injection is coming via the March 2021 bill.

The above outlooks are courtesy of Morningstar.

Market Commentary

Wall Street closed mixed with the tech sector eking out large gains and the S&P 500 barely missing a new high. On Wednesday, investors weighed President Biden’s infrastructure spending plan which would raise the corporate tax rate to 28% to fund it, combined with measures to stop offshoring of profits. On the macro side, private payrolls expanded in March at the fastest pace since September 2020, with 517 thousand net additions which were slightly below the 525 thousand consensus estimate. Meanwhile, investors await the key March employment report on Friday, which is expected to show that the economy added 630 thousand jobs in March. The Dow Jones dropped 84 points or 0.3% to 32,983. In contrast, The S&P 500 added 15 points or 0.4% to 3973. The Nasdaq jumped 202 points or 1.5% to 13,247. During the month, the Dow Jones gained 7%, and the S&P 500 4.6%.

WTI crude futures swung between small gains and losses below the $61.0 per barrel on Wednesday, ahead an OPEC+ meeting where major producers are likely to extend the current production cut into May when they meet on Thursday amid concerns about extended restrictive measures in Europe, slow vaccine rollouts and rising COVID-19 cases in India and Brazil. Russia said it would support stable oil output, while Saudi Arabia showed willingness to back an extension of the supply cuts into June. Meanwhile, an API report showed a bigger than expected build in US crude stocks last week. WTI crude has shed more than 1% so far this month, compared with a 17.8% rise in February.

The yield on the benchmark 10-year Treasury note was little changed at 1.74% on Wednesday, after hitting a fresh 14-month high of 1.776% in the previous session. Investors await President Biden to provide more details on the new infrastructure plan while the ADP employment report will give an update on the labour market. The 10-year Treasury yield soared 83 basis points in the first quarter of the year, the biggest increase in over a decade as coronavirus vaccination and further fiscal stimulus support prospects of a strong economic recovery but could also lead to a spike in inflation and debt levels.

The dollar index fell towards 93.0 against a basket of currencies on Wednesday, but remained close to levels not seen since early November. The greenback headed for a 2.5% monthly gain, its best month since November 2016, helped by prospects of a strong economic recovery in the US due to the approval of President Biden's stimulus package, the ongoing vaccination campaign and upbeat economic data signaling a gradual recovery in the US jobs market. On the quarter, the greenback gained 3.5%, which would be the best quarter since Q2 2018.

Cotton futures traded around 80 cents per bushel at the end of March, booking a 7.6% monthly loss from February, pressured by a firmer dollar. At the same time, investors continued to monitor a potential escalation of tensions between the US and top cotton buyer China after Washington condemned China's sanctions against two American religious-rights officials in a dispute over Beijing's treatment of Uighur Muslims. On a quarterly basis, cotton gained 3.8% amid hopes of a solid economic recovery in 2021. Also, the US Department of Agriculture said on Wednesday farmers plan to sow 12.036 million acres with cotton this year, down less than 1% year-on-year but beating market expectations of 11.905 million..

Chicago wheat futures traded around $6.2 per bushel at the end of March, having touched $6.05 on Wednesday its lowest level since December 16th and having suffered a 5.4% monthly a 3.3% quarterly decline. A stronger dollar and favorable weather across major producing regions including the US and Russia weighed on sentiment, despite the prospect of a strong economic recovery. Meanwhile, the US Department of Agriculture said on Wednesday farmers plan to sow 46.358 million acres with wheat this year, beating market expectations of 44.971 million. The report also showed that March 1st stocks of wheat totaled 1.31 billion bushels, down 7% year-on-year and compared with market consensus of 1.27 billion. 

Chicago corn futures traded above $5.3 a bushel at the end of March, remaining close to its highest level since July 2013, on stronger demand from China and supply concerns due to inclement weather in South Africa. And although the commodity has fallen 3.3% in March it is still up 11% since the beginning of the year amid hopes of global economic recovery. The US Department of Agriculture said on Wednesday farmers plan to sow 91.144 million acres with corn this year, the most since 2016, but missing market expectations of 93.208 million. The report also showed that March 1st stocks of corn totaled 7.70 billion bushels, down 3% year-on-year and compared with market expectations of 7.767 billion.

Soybean futures traded around $14 per bushel in the last week of March, having touched on Tuesday its lowest level in two-and-a-half weeks. Still, soybeans booked a 2.6% monthly gain in March and an 8.9% quarterly rise in Q1, helped by the prospect of a strong economic recovery in 2021. The US Department of Agriculture said on Wednesday farmers plan to sow 87.600 million acres with soybeans this year, the most since 2018, but missing market expectations of 89.996 million. The report also showed that March 1st stocks of soy totaled 1.56 billion bushels, down 31% year-on-year and compared with market consensus of 1.53 billion

The Baltic Dry Index fell 57 points, or 2.7% to 2,046 on Wednesday, its weakest since March 16th and extending losses for a third session. The panamax index which tracks cargoes of about 60,000 tonnes to 70,00 tonnes of coal and steel-making ingredient iron ore, fell 147 points to 2,576; and the capesize index, which tracks iron ore and coal cargos of 150,000-tonnes, edged down 7 points to 2,210. Among smaller vessels, the supramax index dropped 45 points to 1,871. The index advanced 22% in March of 2021, its best month since June 2020. On the quarter, the Baltic Dry Index gained nearly 50%, which would be the best quarter in three.

Spot gold rose above $1,700 per ounce on Wednesday, after touching earlier in the session its lowest since March 8th, as the Biden's administration is set to outline how it intends to pay for a $3 trillion-$4 trillion infrastructure plan. Still, the metal headed for a third straight monthly decline and was on track for an over 11% quarterly decline, its biggest in more than four years, amid the prospect of a strong economic recovery in the US, rising bond yields and a stronger dollar.

Pending home sales in the US fell 0.5 percent year-on-year in February of 2021, following an upwardly revised 13.5 percent rise in January. It is the first decline since May as interest rates edged up and supply was near all-time lows. On a monthly basis, pending home sales shrank 10.6 percent, the second consecutive month of declines. "The demand for a home purchase is widespread, multiple offers are prevalent, and days-on-market are swift but contracts are not clicking due to record-low inventory. Only the upper-end market is experiencing more activity because of reasonable supply. Demand, interestingly, does not yet appear to be impacted by recent modest rises in mortgage rates", said Lawrence Yun, NAR's chief economist.

Mortgage applications in the US fell 2.2 percent in the week ended March 26th, 2021, the 4th consecutive decline, as higher mortgage rates started to dent the market. Applications to purchase a home went down 1.5 percent and home refinancing dropped 2.5 percent. The average interest rate for 30-year fixed-rate mortgages edged down to 3.33% from 3.36% which was the highest since the beginning of June, and pausing 7 consecutive weeks of rising rates. “Higher mortgage rates continue to shut down refinance activity, as the pool of borrowers who can benefit from a refinance further shrinks. Many prospective homebuyers this spring are feeling the effects of higher rates and rapidly accelerating home prices” said Joel Kan, an MBA economist.

The MNI Chicago Business Barometer in the US increased by 6.8 points to 66.3 in March 2021, the highest level since July 2018 and above market expectations of 60.7. Among the main five indicators, production saw the largest gain (up 10.1 points to a three-year high), followed by new orders (up 7.1 points) while order backlogs saw the biggest drop (down 6 points). Through the first quarter the index gained 4.4 points to 63.2, the strongest reading since Q3 2018.

Private businesses in the US hired 517K workers in March of 2021, compared to market forecasts of 550K. It is the highest increase in private payrolls in 6 months. The service-providing sector created 437K jobs led by leisure and hospitality (169K); trade, transportation & utilities (92K); professional and business (83K); education and health (68K); other services (22K); and financial activities (9K) while the information sector lost 7K jobs. The goods-producing sector rebounded and added 80K jobs, due to manufacturing (49K) and construction (32K) while natural resources and mining shed 1K jobs. Private payrolls in midsized companies were up by 188K, small firms by 174K and large companies by 155K.

LME nickel fell 14% so far in March, the most in a year, to a near 4-month low of $15,897/tonne as concerns about supply shortages eased following China’s Tsingshan announcement to produce a large amount of nickel matte in Indonesia earlier in the month. Still, the commodity growing usage in lithium-ion batteries and the accelerated roll-out of electric vehicles should drive prices higher in the long-run.

Copper is on course for a 2% drop in March, the first monthly decline in a year as a stronger dollar, sanctions between China and the West, and new coronavirus lockdowns in Europe rattled sentiment. However, the commodity considered an economic barometer, is heading for an over 13% gain in the first quarter of the year, extending gains for the fourth consecutive quarter as tight mine supply, demand hopes and strong liquidity in the financial markets pushed prices to a near decade high of $4.3 a tonne in February. Despite demand started to ease from China, Biden’s $2 trillion infrastructure plan and supply tightness are expected to support prices.

Prices for iron ore cargoes with a 63.5% iron content for delivery into Tianjin fell from a 2-week high of $167/tonne amid uncertain demand outlook for the steel-making ingredient due to environmental curbs in China's top steel-producing city Tangshan while Brazilian miner Vale, the world’s top producer, is expected to recover to normal output levels by the end of 2021. Putting a floor under prices was upbeat profit at mills leading to some buying of raw materials. Meantime, the latest data from the statistics bureau showed China’s official manufacturing PMI expanded at the quickest pace in three months in March and export orders returned to growth.

European stock markets closed mostly lower a volatile session on Wednesday, with Frankfurt’s DAX closing nearly flat and not far from its record high after flash estimates showed consumer prices in the 19-nation Eurozone economy rose at the fastest pace since January last year. Still, the rise is expected to be temporary due to the base effect and as the economic outlook remains bleak, as Europe is now battling a third wave of the coronavirus and lags behind the US and the UK in Covid-19 vaccination. Also, the index that excludes alcohol and tobacco, and that the ECB pays close attention to when trying to predict whether any trend in the headline rate is sustainable or not, eased to a 3-month low of 0.9%. Meantime, Germany restricted the use of the AstraZeneca vaccine to people over 60 while the number of people in intensive care units with COVID-19 in France reached the highest level this year. The DAX 30 advanced almost 9% in March on expectations of a global economic rebound.

The FTSE 100 closed 58 points, or 0.9% lower at 6,714 on Wednesday, down from a 0.5% gain in the previous session, with meal delivery company Deliveroo tumbling more than 20% in its stock market debut on concerns over the company’s employment practices. On the data front, the British economy expanded 1.3% on quarter in Q4, slightly higher than initial estimates of a 1% growth. Considering the first quarter of the year the FTSE 100 advanced almost 4%, gaining 3.6% only in March supported by hopes of a quicker economic recovery helped by the UK’s rapid pace of vaccinations.

The CAC 40 closed slightly down at 6,074 on Wednesday, remaining close to yesterday's 13-month high and booking a 6.5% monthly gain and a 9.4% quarterly rise. Investors balanced worries about extended pandemic lockdowns in Europe, slow vaccine rollouts and rising bond yields with optimism about a global economic recovery. On the economic data front, household consumption in France stalled in February, missing market expectations of a 2% growth; while the inflation rate picked up in March to the highest level in over a year, signaling a gradual recovery in domestic dem

The Nikkei 225 fell 253.9 points or 0.86% to 29178.8 on Wednesday, falling 0.8% for the month and snapping 4 months of consecutive gains as investors sold financial shares due to growing uncertainty over the fallout from the margin calls that brought down New York-based hedge fund Archegos Capital. Japanese government bond yields also rose on speculation that the BoJ will reduce bond purchases for its quantitative easing policy. Local 10-year bond yields were at 0.09% while US 10-year rates hit fresh 14-month highs at 1.726%. Among individual stocks, Nomura Holdings fell 2.9%, declining for the third straight session after stunning investors by flagging a potential $2 billion loss from a single US client. On the data front, industrial output in Japan fell 2.1% mom in February, worse than expected. Meantime, Japan's housing starts dropped by 3.7% yoy in the month, the 20th straight month of fall.

The Shanghai Composite lost 14.77 points or 0.43% to 3441.91 on Wednesday, falling 3.27% for the month amid concerns over rising long-term bond yield and worries over a broader market meltdown due to a defaulting hedge fund. Reports that Washington condemns moves by Beijing to further reduce political participation and representation in Hong Kong also dragged down sentiment. In the US, President Joe Biden is expected to roll out details on increased government spending to reduce inequality and strengthen infrastructure. A revamp of the tax code is also part of the plan. On the data front, the manufacturing sector in China grew the most since last December while services activity rose at the strongest rate in four months, bolstering the case for dialling back policy support in the Asian nation. In Hong Kong, the Hang Seng Index fell 100.85 points or 0.35% to 28476.65 and declining 3.22% on-month.

Thank you and please stay tuned for more upcoming reports.

Len Martinez PhD CPA is President of Bull Valley Advisors. Len publishes the "Bull Valley Advisor", a Stock Market newsletter for Institutional Investors, featuring his BVA Value Momentum Portfolio Strategy.

Information in this report and the "Bull Valley Advisor” newsletter should not be considered as investment advice or an offer to buy or sell securities. Data is derived from sources considered to be reliable including Morningstar, StockCharts.com, YAHOO Finance, FINVIZ, TipRanks, Investing.com, ECRI, OECD, gurufocus, Crestmont Research, Trading Economics, IBD and S2O. Results are not guaranteed. Len Martinez is not an RIA. The data is shown for informational purposes and should not be considered investment advice or an offer to buy or sell securities.

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