Quarterly Client Letter – 1st Quarter 2021

The major U.S. stock averages ended the quarter solidly higher, and very near all-time highs.  However, unlike most of the last few years, the source of returns was decidedly different. 

After years of the very largest technology stocks accounting for the lion’s share of market gains, this year so far has been marked by a welcome rotation into smaller stocks and so-called “value” stocks.  As a result, the small-cap Russell 2000 index has outperformed the large-cap S&P 500 by a wide margin this year, up 12.7% vs. 6.2%.  And within the Russell 1000 (large caps), value outperformed growth by an even wider margin, up 11.2% for value vs. 0.9% for growth.  Many of our small-cap and value-oriented stock funds produced double-digit returns this quarter.  Within the S&P 500, the leading sectors have been Energy, Financials and Industrials, all outpacing Technology, after years of lagging behind.  This rotation is something we have long anticipated, based primarily on valuation disparity.  But it nevertheless begs the question: “Why now?”

Over the past several weeks, you may have heard or seen that interest rates have been creeping up.  And stocks sold off a few percent from the February highs as the markets attempted to digest a swift move up in the yield on 10-year Treasuries.  The 0.83% increase in the yield on the 10-year Treasury was the largest quarterly move since Q4 2016.  For our balanced accounts with large bond positions, the news was mixed.  Absolute returns from our bond funds ranged from roughly -3% to +2%, and in aggregate we were probably about breakeven on all our bond positions, dampening the strong returns from equities.  On the other hand, our bias toward short-duration, high-quality bonds meant that many of our positions outperformed the benchmark.  While rising rates hurt bond prices, ultimately, once rates stabilize, it will allow for bond positions to produce more meaningful income yield.

The sharp jump in yields (albeit from an incredibly low base to a still very low level by historical standards) spooked the markets about the threat of inflation.  To be clear, we do view inflation as a legitimate concern.  However, we think we are a long way from a level of inflation that warrants any immediate concern.  To the contrary, we view higher rates as normal, healthy, and appropriate for an economy in recovery.  The pundits will point out that what really matters is whether rates are rising for the “wrong reasons” (i.e. inflation) or the “right reasons” (i.e. improving economic fundamentals).  After some collective hand-wringing, the market has concluded that the “right reasons” prevail.  And that is the camp we are in, at least for now. 

However, even when interest rates rise for the “right reasons,” it has implications for stock valuations.  Valuation multiples (i.e., P/E ratios) come down, but more so for highly valued growth stocks than lower-priced value stocks.  Likewise, earnings estimates improve, but less so for growth stocks than value stocks with more cyclical earnings.  The combination of those forces makes lower P/E stocks with more cyclical earnings much more attractive on a relative basis than their higher P/E, higher-growth counterparts.  And that explains why small caps are outperforming large and why value is outperforming growth. 

Long-time readers of our commentary know that we have, perhaps stubbornly, adhered to the view that owning small-cap stocks and having a value tilt would ultimately work in our favor, and we are glad to see it.  Astute followers of our previous letters may notice that the one area that we have long favored that has yet to reward our dogged determination is international.  Granted, they have generated solidly positive returns in the quarter and over the last year, but still lag behind the U.S.  Perhaps the biggest surprise here is that we expected the rest of the world to emerge from the pandemic sooner, based on the early pandemic response efforts, but the aggressive rollout of vaccine here in the U.S. may have helped us accelerate our recovery despite our higher case counts.  Regardless, if inflation does ever present problems in the U.S., a weaker dollar will make overseas assets more attractive, and we think continued exposure is an excellent hedge against those risks.



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Sissy Moreland

Client Services Trading

A graduate of Mississippi State University, Sissy joined Medley & Brown in 2017, but her career goes all the way back to 1990 when she was the merchandise director for four years at Phi Theta Kappa. She was also Customer Service Manager and Marketing Development Manager at Crystal Springs Apparel from 1994 to 2005. From 2005 to 2017, she was Manager of Sales Administration at Skyhawke Technologies. Thanks to her considerable operations and administrative experience, Sissy oversees trading and assists with most back-office operations for the firm. Staying so busy at work requires Sissy to recharge her batteries outside the office from time to time which she does by running, reading, enjoying a leisurely brunch, and watching the Saints play football.

Beth Braswell

Client Services Coordinator

Beth spent four years in the investment world before joining Medley & Brown in 2004 as our operations coordinator. She and her husband Robbie are busy parents to identical triplet daughters, so not surprisingly, some of Beth’s favorite things to do are napping and relaxing on the beach when she actually finds the time. Beth also enjoys taking short walks to the pool, attending concerts, and going out of town for long weekends. Beth loves her Mississippi State bulldogs and currently has four dogs, three cats, and three grandcats because having three children simply isn’t enough. No wonder her operational skills are so exceptional.

Doug Muenzenmay, CFA, CFP®

Senior Advisor   |   Principal

When he’s not enjoying the outdoors or attending his children’s school and sporting events, you can find Doug studiously researching investments for his clients. His career began in 1991 after graduating from the University of Iowa with a bachelor’s degree in economics. He spent 17 years in trust investments at three different banks before joining Medley & Brown in 2010. Doug also got his MBA from Mississippi College and served as an adjunct professor in finance there from 2007 to 2013. Married to his wife Sharon since 2001, Doug is a Chartered Financial Analyst (CFA), Certified Financial Planner (CFP), and a board member of the CFA Society of Mississippi.

Eddie Carlisle, CFP®

Senior Advisor  |   Principal  |  Chief Compliance Officer

Eddie’s extensive education includes a B.S.B.A. in accounting, with special distinction, from Mississippi College in 1994, along with a J.D. from Vanderbilt University and LL.M. (Master of Laws) in taxation from the University of Florida. But it’s what he’s learned outside of school and work that really stands out. He’s an Eagle Scout, which taught him a great deal about honesty and hard work from an early age. He learned even more earning black belts in Taekwondo, Hapkido, and Hanmudo. Oh, and he studies the Korean language in his spare time as well. Additionally, Eddie serves as an adult leader for Scout Troop 164 in Madison. He is a past board member of Hope Hollow Ministries, the Central Mississippi Down Syndrome Society, and the Mississippi Corporate Counsel Association. Eddie is currently a board member of the Woodward Hines Education Foundation. He enjoys spending time with his wife, Sarah, and their three children—Andrew, Caroline, and Emma. 

Julius Ridgway

Senior Advisor   |   Principal

Judging from his background, you’d think investments and other financial matters were all Julius cares about. After all, he has two decades of direct investment experience and spent the previous ten years involved in banking and real estate. Julius also received a masters degree from the London School of Economics in 1998, an MBA from Millsaps College in 1993, and a history degree from the University of Mississippi in 1990. But his true passions include driving sports cars on racetracks or twisty mountain roads, running ultramarathons, and taking road trips with his wife and son. He’s worked here since 2002 as a Chartered Financial Analyst (CFA) and member of the CFA Institute while also serving as an adjunct instructor at Millsaps College and board member of New Stage Theatre. It takes major dedication to tackle all these responsibilities—sort of like training for all those long distant runs—but Julius enjoys every minute of the grind. And when it’s time to slow down, Julius finds the best way to clear his head is taking long hikes in the mountains on all those road trips.