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In The News

1st Quarter Commentary From the Desk of Arthur D. Lyons, CIO


Equity markets continued their upward trend from last year, propelled by continued low interest rates and positive economic news. Despite occasional concerns about reopening, vaccination rates (notice very few are interested in hospitalization or death rates anymore), inflation and long-term interest rates, and overall investor interest definitely favored stocks.

Which equity market are we referring to? As mentioned numerous times last year, equity prices have been quite varied, depending on short-term investor sentiment. For example, 1st quarter total returns ranged from 6.17% for the S&P 500, to 11.24% for the value-driven (financials and energy emphasis) Russell 1000 Value. The MSCI All Country Index was + 5.14%, the DJIA + 8.29% and the small-cap Russell 2000 was the winner with +12.69%. That’s a large disparity between indices, especially considering it was only one quarter’s performance.

Despite these strong returns, it was anything but a straight line up. There were investor concerns about inflation, initially signaled by the bond market. Interest rates between February and March increased over 60 basis points for the 10-year U.S. Treasury note. This was a staggering 50% yield increase in only six weeks! Since growth stock valuations are adversely affected by higher interest rates – at least in the short term – the NASDAQ index experienced a 10% correction from mid-February to early March. Since that time it has regained over half the loss.

The catalyst for this equity rebound was due in large part to comments made by Federal Reserve Chairman, Jerome Powell. The Fed is looking for modestly higher inflation this year, including a spike to the 3% area during the summer. Overall, it feels inflation will settle between 2-2.5%, which history has shown to be a positive range for equity investors.

The modest inflation forecast calmed the bond market for the time being, but spreads remained wide between short- and long-term interest rates. This reflects some of the anticipated inflation levels preferred to by Chairman Powell. AWM&T believes that interest rates will move modestly higher during the year, as inflation trends higher, reflecting global economic growth. The Fed has said in years past that this is a good thing. Modest inflation, as currently anticipated, reflects renewed economic growth that we are all hoping for.

In the longer term, where is inflation headed? The primary concerns focus not on the labor or commodity areas, but on U.S. fiscal policy, including national debt and current spending, as they relate to real GDP and its growth rate. Will AWM&T be monitoring this? Yes. What degree of impact will fiscal policy have on investment decisions? This remains to be seen. Remember, the exact same concerns were voiced in 2009. Spending, deficit and debt were “out of control,” rising to never-before-seen levels. What happened with inflation? It actually declined, confounding even the most brilliant economists.

AWM&T’s theory, as we have stated numerous times, is that technological advances throughout every industry are driving productivity levels high enough to offset inflationary factors. It is difficult for traditional economic measurements to accurately capture the full economic benefits of these added efficiencies. For this reason, we believe inflation will be contained within the average historical level of 3.5%, despite fiscal and monetary stimulus.

Unfolding for 2021… 

The equity markets continue to operate in the favorable environment of low inflation and interest rates. As markets adjust to the recent, sudden interest rate move, we believe growth companies will resume their outperformance of so-called value type companies. We continue to look for U.S. outperformance versus the world and a resumption of large-cap versus small-cap outperformance. Keep in mind that on any given day, week, or month, strong sector “rotations” can occur. It has not been unusual to see institutional investors move large funds from one sector to another, reflecting an investor uncertainty and volatility that is historically short-term. In the longer term, we look for reduced volatility and strong corporate fundamentals from our equity allocation.

The bond market has struggled due to higher rate movement and we anticipate a tough year ahead. Already in the 1st quarter, the intermediate bond index was down -1.86% on a total return basis. As economic data unfolded during the quarter, AWM&T made portfolio adjustments to reduce interest rate risk. Additionally, we took advantage of very narrow credit spreads to reduce both investment-grade and high-yield positions, replacing them with short-term U.S. Treasury and adjustable-rate securities. While we cannot promise a positive return for the year, we can say that we have taken steps to reduce the level of interest rate and credit risk to the portfolio. This could benefit portfolios from a risk-return standpoint.

Given the risk-reward profile of these asset classes, overall allocation remains fully invested in equities, with an underweighting in fixed income. 

Common Questions

Yes, your AAFMAA policy will cover a death related to COVID-19 if you are an existing AAFMAA Member with a policy issued more than two years ago or prior to a COVID-19 diagnosis, even within the first two years the policy is owned. The only exclusion on AAFMAA policies is death by suicide within the first two years.

However it is important to note that death claims made against an underwritten policy issued within the last two years are contestable, regardless of the cause of death. Contestable death claims are reviewed and subject to denial if we find undisclosed material information that would have changed the outcome of the policy issuance decision.

Yes, if you are applying for a policy that requires medical underwriting, you must disclose a positive COVID-19 diagnosis. Not doing so would be considered material misrepresentation and could result in your policy being voided.

As mentioned above, death claims made against an underwritten policy issued within the last two years are contestable, regardless of the cause of death. Additionally, you don’t have to die for a material misrepresentation to void your contract. The policy can be voided at any point within the first two years if AAFMAA finds that you provided incorrect information about your health history and that the correct information would have prevented us from issuing the policy.

If you were diagnosed with having contracted COVID-19 prior to applying for life insurance and you failed to disclose that diagnosis on your application, your death claim could be denied. This is because, if you had disclosed your COVID-19 diagnosis, we would have followed current industry guidelines and possibly postponed acceptance of your application. In this case, your policy would be voided and your survivors would only receive a refund of the premiums you had paid.

No, the COVID-19 vaccine is classified as a typical wellness check, for which we do not require disclosures and do not deny death claims. We strongly suggest that our Members follow CDC recommendations and receive the COVID-19 vaccination as soon as they are eligible.

Industry guidelines indicate that a COVID-19 diagnosis may postpone acceptance of your application for a period of three weeks to 1 year following recovery, depending on the severity of symptoms and treatment. This timeline is subject to change as new information becomes available and industry guidelines are adjusted accordingly. Those who experience a full recovery may be considered for issue before 12 months, while serious cases (such as those which required a ventilator) may be postponed for longer.

No. Receiving a COVID-19 vaccination will not affect the acceptance of your application.

No, AAFMAA cannot change your premiums or your health classification on a policy you currently hold. Your premiums and health classification will remain the same, even if you have been diagnosed with COVID-19 or you are at a higher risk of exposure due to your job, living situation, or recent travel, or if you get one of the COVID-19 vaccinations approved for emergency use by the USFDA.