The S&P Volatility Index (VOLATILITYINDICES:^VIX), more commonly known as the VIX, is around its lowest value since the pandemic started. But don't let that trick you into thinking there's nothing but smooth sailing ahead. We live in strange times, and investors need to make sure they aren't caught off guard by emerging trends as we move into April. Inflation and interest rates have surpassed the pandemic as the most prominent stock market risks, according to surveys.
These uncommon circumstances shape my five predictions for investors who will be managing their stock portfolios in April.
Image source: Getty Images.
1. The bond market will be influential
Inflation and interest rates have surpassed the coronavirus as the biggest risk, according to Bank of America's monthly survey of asset managers. It's not likely that the Fed will be raising rates, but there are signs that bond investors aren't fully convinced. Treasury yields have inched higher in recent weeks, spurred mostly by the gathering signs that inflation might be high moving into the back half of 2021.
If higher-than-expected inflation and lower-than-expected unemployment figures are reported in Q2, it might force the Fed to raise rates more quickly than it has broadcast. If that happens, the stock market will likely endure volatility or even a moderate downturn. Equity investors will be watching the bond market for warning signs. Make sure your portfolio is built to deliver long-term growth while managing short-term volatility.
2. The pandemic won't be forgotten quite yet
The worst of the damage may indeed be in the rearview mirror, but investors may have been too quick to declare the pandemic complete. More vaccinations, fewer restrictions, and many Americans returning to work are all encouraging signs. However, the public's fervor to return to normal might create some uncertainty.
In the past week, we've seen case numbers spike, heard stern warnings from the CDC, and read about lockdowns in other countries. There are also rumblings that new coronavirus strains are resistant to the major vaccines. I hope that we can safely treat patients while reopening the battered travel and hospitality industries, but current market conditions make the situation more fragile if there's a hiccup. If hospitals start filling up too quickly, or if the vaccinations turn out to be less effective than forecast, there's a good chance we will see a pullback in the stock market, especially in those recovery plays such as airlines, brick-and-mortar retail, hotels, amusements, and dining.
As long as COVID-19 threatens to put people in hospitals at rates the healthcare system isn't prepared to handle, it's an investment risk that needs to be monitored.
3. Value vs. growth will remain an important theme
In March, there was a clear performance discrepancy in growth versus value stocks. They even moved inversely on some trading days. As stated above, it's hard to know exactly how monetary policy will change in the next few years. We don't quite know when the pandemic will cease being an issue, and it's hard to tell where we stand in the market cycle. As such, there's a good chance that we'll continue to see some divergence between value and growth stocks. With all of the uncertainty swirling, each might appear to have the upper hand at times in April.
I expect value and growth to continue getting attention this month, and it would be wise to have some of each in your stock portfolio to make sure you capture upside regardless of the outcome.
4. Midstream energy represents an opportunity
Crude oil prices have steadily improved to pre-recession levels. After last year's chaos in the energy sector, some companies might need even higher energy prices to restore optimal financial health. Nonetheless, valuations across the whole sector still appear at a discount to both other industries and historical values.
Notably, there are some enormous dividend yields in midstream stocks. These companies aren't as dependent on the prices of crude oil or refined products, and they tend to have predictable cash flows as long as the volume of transported oil and gas is normal. Further, many of them are organized as master limited partnerships (MLPs), which are obligated to distribute a major portion of earnings to shareholders.
Fourth-quarter results suggest recovery for several of the major midstream MLPs, yet their yields still imply major operational risk. If the energy sector can remain stable, then the midstream MLPs should kick off fantastic dividend income. Those share prices should also increase substantially if yields equalize with other sectors.
5. The SPAC craze cools off
SPACs have become very popular over the past year or two, and the volume of them being listed so far this year is blowing away any previous record. Investors were also eager to get involved, and SPACs that hadn't yet deployed their capital were outperforming the market by a significant margin during last year's growth stock fervor. Investors were rushing to buy companies before the identity of those companies had even been revealed.
You should fully expect the number of SPACs listed on exchanges to continue rising. However, the rotation away from aggressive growth stocks, along with competition from the glut of SPAC alternatives should put downward pressure on returns between the time of listing and the eventual acquisition of an operating business.
Image source: YCharts
SPAC performance could very well remain excellent. However, the unbridled bullishness already appears to have faded, if we look at the performance of the SPAC and New Issue ETF (NYSEMKTS: SPCX). If you're going to use SPACs to outpace the market in April, you might have to work a little bit harder to identify winners rather than blindly trusting the asset class as a whole.
