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First Quarter Newsletter

Responsible Guidance:  First Quarter 2021 Newsletter, April 2021

Staying Disciplined

In James Clear's book, Atomic Habits, he discusses the development of the human brain and the difficulty humans typically have in making choices that have a delayed benefit or delayed gratification versus those that have instant rewards.  Clear reminds us that our ancestors’ brains’ development-making decisions were much more focused on immediate gratification, like procuring food, finding shelter, or even avoiding a predator.

As society developed, so did both the opportunity, and maybe to some people the curse, to delay gratification.  Most of our decisions today do not result in immediate gratification.  This is a struggle for our brains because our brains were originally developed to prefer short-term payoffs versus long-term benefits.  Planning for Your Personal EconomySM is focusing on your future.  With a good plan that helps you understand the strength of Your Personal EconomySM, you can better evaluate decisions, including those times when you might want to just give into those choices that allow for instant gratification.

For our clients, understanding their Personal EconomySM and how the investment strategy works within their plan, creates a disciplined and focused approach on the long-term, which has been helpful, given the volatility in the markets over the most recent 12 months.

A Global Perspective

A core objective for our customized Baron Financial Group investment strategies is global diversification.  Global diversification means including investments based both domestically in the U.S., as well as internationally in developed and developing countries. 

There are popular benchmark indexes that provide perspectives about performance of global investments.  For equities, we monitor the MSCI ACWI All Cap Index.  This index is designed to represent equity investments across 23 developed and 24 emerging markets.  The index was up 5.22% in the first quarter, as equity performance continued to move in a positive direction.  For fixed income, or bonds, we track the FTSE World Government Bond Index.  The index tracks sovereign debt from 20 countries, denominated in their respective currencies.  It was down 5.68% in the first quarter.  Investors clearly have been shifting resources toward risk assets over the previous few quarters and have had less demand for bonds, diving bond prices lower and yields higher.

U.S. Economy

The economic picture is becoming clearer, but there remain concerns about the ability to fully recover and impacts, such as inflation, that may result from efforts to ignite or keep economies going. 

The Bureau of Economic Analysis (BEA) announced in its third estimate for the fourth quarter of 2020 that real Gross Domestic Product (GDP) increased 4.3%, following the substantial turnaround that occurred in the third quarter. 

The BEA regularly releases a note with GDP data.  The note can be found on their website at www.bea.gov.  "The increase in fourth-quarter GDP reflected both the continued economic recovery from the sharp declines earlier in the year and the ongoing impact of the COVID-19 pandemic, including new restrictions and closures that took effect in some areas of the United States. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the fourth quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified. For more information, see the Technical Note and Federal Recovery Programs and BEA Statistics."

GDP is a measurement of what has already happened.  There are, however, statistical measures that give insight into the future.  One of those measures is The Conference Board Leading Economic Index® (LEI) for the U.S. The index is an analytical tool that helps signal peaks and troughs in the business cycle.  The February LEI, released on March 18th, improved to 110.5 (2016 = 100), following increased readings in January and December. 

“The U.S. LEI continued rising in February, suggesting economic growth should continue well into this year,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “Indeed, the acceleration of the vaccination campaign and a new round of large fiscal supports are not yet fully reflected in the LEI. With those developments, The Conference Board now expects the pace of growth to improve even further this year, with the U.S. economy expanding by 5.5 percent in 2021.”

“Despite widespread improvements among the leading indicators, some measures—including weekly hours in manufacturing, permits for residential housing, and consumers’ outlook for business and economic conditions—showed signs of weakness. Bad weather and assorted supply-chain disruptions may have impacted these particular leading indicators in February, and the effects may prove transitory.”

We think the following chart is an important tool to help potentially signal changing economic environments, such as recessions. The blue line represents the LEI, dating back to the year 2000.  Since then, we have had two official recessions, which are identified by the shaded gray areas.  A recession is typically defined as two consecutive quarters of negative economic growth.  Using the last two recessions as a gauge, we believe that the chart suggests that there was significant erosion in the LEI (blue line moved lower) prior to the economy going into recession.  Of course, in 2020, the shutting down of economies to help slow the spread of the virus lead to violent changes in economic numbers.  Though we did not have 2 quarters of negative growth, we think it is safe to say the U.S. economic environment has experienced new challenges starting in 2020.  There was a quick rebound, and many signals have turned positive, but challenges remain in 2021.

The full release from the Conference Board can be found at:  US LEI PRESS RELEASE - March 2021.pdf (conference-board.org)

According to the Bureau of Labor Statistics (BLS), the U.S. gained 916,000 jobs for the month of March, and the unemployment rate moved lower to 6.0%.  BLS suggests that job growth was driven by the resumption of economic activity that had been stifled due to shutdowns related to the Coronavirus pandemic.

The Conference Board Consumer Confidence Index® increased in March to 109.7 (1985 = 100).  This is the highest reading in a year.

“Consumer Confidence increased to its highest level since the onset of the pandemic in March 2020,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions and their short-term outlook improved significantly, an indication that economic growth is likely to strengthen further in the coming months. Consumers’ renewed optimism boosted their purchasing intentions for homes, autos and several big-ticket items. However, concerns of inflation in the short-term rose, most likely due to rising prices at the pump, and may temper spending intentions in the months ahead.”

U.S. Stocks

The S&P 500, an index consisting of 500 of the largest U.S. domestic stocks, was up 6.17% in the first quarter.  For technical analysts and trend followers, the index remains above its 200-day moving average.  As regular readers of our letter know, technology stocks have dominated in terms of performance the last 10 years, which means their influence has grown significantly on market-cap-weighted indexes, like the S&P 500.  However, value stocks did outperform in the first quarter.  Will this be the beginning of a trend reversal, or just short-term stock rebalancing?

International Stocks

International developed country equities (such as those in the European Union), measured by the MSCI EAFE index was up 3.48% in the first quarter.  Non-developed, or emerging countries (such as China, India, Brazil, or Russia) measured by the MSCI EM index, was up 2.29% for the quarter.    


U.S. Domestic Fixed Income (bonds), as measured by the Barclays U.S. Aggregate Bond Index, produced a negative 3.37% return in the first quarter.

The 10-year U.S. Treasury bond yield was 1.74% on 3/31/2021, which was much higher than where it began the year at 0.93%.  The last time the yield was this high was before the pandemic started. 

If you plot interest rates versus the time-to-maturity to earn those rates, you have created a yield curve. We continue to monitor the changing shape of the yield curve for U.S. debt issues, and what that may signal. Specifically, we follow the shape of the yield curve (plot of interest rates for different time periods).  Using the U.S. Government 2-year bond rate as a proxy for short-term rates and the 10-year U.S. Government Bond rate as a proxy for long-term rates, we calculate the difference between the rates, which provides a possible indicator for the future direction of the economy.  A steep spread (long-term rates higher than short-term rates) indicates possible future economic expansion and fixed-income investors are compensated for taking longer-term risk.  A flat spread (long-term rates match short-term rates) is a possible indicator of economic uncertainty and longer-term investors are not being compensated for investing in longer-dated securities.  An inverted spread (short-term rates are higher than long-term rates) possibly indicates future economic contraction.

The first quarter finished with the 2-year rate at 0.16% while the 10-year, as mentioned, continued to move higher to 1.74%, causing the curve to steepen.  Technically speaking, that suggests an upward sloping or steep curve.  The 158-basis point spread (a basis point represents 1/100 of 1%) is larger than where the year began, at 80-basis points.  Though steeper, we think it is safe to say that the bond market is not signaling a definitive clear path for economic growth.  The facts that short-term rates are basically pinned by the Fed and there are inflation concerns currently impacting long-term rates make the yield curve shape unique for these times.

Housing and Real Estate

Commercial real estate, as measured by the FTSE NAREIT All Equity REIT (Real Estate Investment Trust) Index continued to rebound and was up 8.32% in the first quarter.  Keep in mind that REIT investments are not limited to office space only.  We hear opportunities continue to increase for areas related to tech, such as data centers and cell towers, self-storage, and healthcare, to name a few. 

According to Freddie Mac (FM), the average 30-year residential home mortgage rate remains near all-time lows at 3.13% with 0.7 Fees/Points.  The rate is subject to change and may not be offered in all areas or to all borrowers.  Two years ago, at the start of 2019, the rate was 4.51% (close to a seven-year high).  The lower rates may continue to have a positive impact on the housing market.  For those who have a current mortgage and have not refinanced in some time, it may be worth looking at potential options.  

Our Baron Answers Video  Should I Consider Refinancing My Mortgage may answer some of your refinancing questions.

Natural Resources

The Bloomberg Commodity Index (BCOM) increased in the first quarter, gaining 6.92%.  The positive performance in the last two quarters could appear to be positive indicators for an improving economy.  But beware of any unexpected inflation.    

Baron Client Strategies

As you read through this newsletter, you may notice many of the equity benchmarks were positive while bond benchmarks struggled.  These market movements continue to present rebalancing opportunities for most client portfolios.  As clients know, we are fiduciaries and operate as fee-only advisors, so there is no benefit to us for making investment transactions.  The reasons we make trades are to align clients' portfolios with their customized, risk-appropriate diversified strategy, and because we believe the actions we take are potentially strengthening the clients' portfolios or financial positions.  We use this same approach with our own personal money. 

No matter the economic environment, our basic principles remain:
Create a globally diversified and risk-appropriate strategy.  Validate the investment choices versus peer investments. Rebalance when needed. Test the strategy in a comprehensive financial plan and obtain regular feedback to update information and advance your financial position.

Your Service Plan

One of our primary roles is to educate our clients to make informed decisions about reaching their goals.  Critical to that process are plan reviews, a process that focuses our attention on your goals, takes account of any changes in your situation and allows us to alter the course, as necessary. If you have had any changes to your financial position or are considering changing financial goals and objectives, please let us know.  For more specifics, check out our “What You Can Expect” document by clicking the button below.

What You Can Expect

Your Personal Economysm


You may have heard us say that we are happy to help clients with issues outside of investing that may have an impact on their financial lives.  We say things like “Lean on us when you are making a decision with anything with a dollar sign involved.”  So, we have been including this section as a reminder of all our services and to share ways in which we can help clients outside of investing.  

Do you know if your financial resources are sufficient to meet your lifestyle needs?  Investing is part of it, but not all of it.  Clients who have done a financial plan with us know their probability of financial success, given their lifestyle needs and resources.  This helps them make financial decisions with confidence, while understanding a range of possible outcomes given the specific decisions they are making.  If you have not taken the time to help us develop a financial plan for you that outlines your personal probability of financial success, we highly encourage you to do this.  The plan should be updated annually, at least, and when there are changes to your financial position and/or changes to your financial goals and objectives.

Concluding Comments

Focusing on short-term results or immediate gratification may not be the best when planning for Your Personal EconomySM.  Having a risk-appropriate investment strategy that works within a financial plan with a long-term focus is a more disciplined approach.  The long-term plan should provide expectations about how you are impacted in different market environments, which should also help in quantifying the impacts from those times when you want to make a decision based on the short-term.

Baron Updates  

We always like to remind you that we focus on Your Personal EconomySM.  Please keep in mind that our service also includes 2 hours of pro-bono advice to your children and grandchildren. All client and child information is kept strictly confidential.  Let us know if any of your family members would like to meet to discuss their specific financial situation.

Because we are not yet ready to meet in-person, we continue to suggest clients consider a video meeting if not done so already.  You do not have to be on camera, but we can be, and can share our screens to help review reports and other information.

Without in-person meetings we have been creating more video content to help keep you informed and maintain a connection with your Baron Team.  Hopefully, you continue to enjoy our video content.

Remember that you can visit our website to gain access to your client portal.  Just click on the client-portal tab, which will allow you to view your account information. The client login requires a username and password to gain access through the portal. Please let us know if you would like to create your portal login or if you would like to learn more about what the portal provides.

Would you like to enroll in paperless Baron statements?  Paperless statements will be accessible through our online client portal in the “Documents” section.  You must be enrolled in the client portal to view your paperless statements. You will receive an email notification each quarter your statements are posted. Contact Baron at 1-866-333-6659 or at info@baron-financial.com to enroll.

For more educational content, please visit our Website Blog. The Baron Advisors are often called upon by journalists for their insights on financial planning and investing.  They are quoted in such prestigious media outlets as The New York Times, CNBC.com, and NJMoneyHelp.com, among others.

We hope to see you soon when safety allows!

Warmest Regards,

Baron Financial Group, LLC

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of April 5, 2021, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Baron Financial Group to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio. Historical performance results for investment indices and/or categories generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. Inclusion of index information is not intended to suggest that its performance is equivalent or similar to that of the historical investments whose returns are presented or that investment with our firm is an absolute alternative to investments in the index (if such investment were possible). Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results. Therefore, an investor’s individual results may vary significantly from the benchmark’s performance.