Second Quarter 2021 Market and Economic Review

MARKET UPDATE

After an already strong start to the year, the markets in Q2 continued to post positive returns and impressive economic data. Ongoing global vaccine rollouts coupled with sizeable fiscal support from governments are the primary reasons we’ve seen continued growth. However, concerns have been steadily rising that this rate of growth is too much too fast, and could lead the Federal Reserve to take preventative action against uncontrolled inflation.

Domestically, this fear of inflation has been felt most by growth companies as rising interest rates that accompany inflation often make it more costly to borrow the funds needed during the earlier stages of the business cycle. The S&P 500, which follows the 500 largest U.S. publicly traded corporations and skews more toward growth, finished the quarter up 8.5% and 15.25% on the year. Comparatively, the equal-weighted S&P 500, which is more representative of value stocks, was up 6.9% for the quarter and 19.2% on the year. The Russell 2000, which tracks the performance of U.S small companies, which is also sensitive to rising rates, showed results of 4.2% for the quarter and 17.5% on the year.

Oil and gas continued its strong run as the global economy reopens and worldwide activity starts to return to normal. Concerns that a slowed vaccine rollout would affect travel and transportation have mostly dissipated as more and more countries get closer to herd immunity. The Dow Jones U.S. oil and gas index showed a 11.8% increase during Q2 and is up 45% on the year.

International markets had a slower start to the quarter due to various delays in vaccine rollouts resulting in the inability to fully reopen some economies but have shown tremendous improvement in the last month. The MSCI EAFE, which tracks the markets of developed nations in Europe, Asia, and the Far East, was up 5.2% for the quarter and 8.8% year-to-date. Emerging markets, facing tougher obstacles due to higher COVID-19 case rates, showed gains of 5% this quarter for a 7.4% total return for 2021.

The U.S. bond market made up some of the losses that were experienced during Q1 when the 10-year Treasury rose rapidly over the course of a few weeks. Despite the lingering fear that the Fed will raise rates from their current state, the U.S. aggregate bond market index rose 1.8% during the quarter bringing the yearly return to -1.6%, while the 10-year Treasury fell slightly to 1.5% from 1.7% at the end of Q1.

* Each benchmark is allocated based on the assumed Risk Profile of underlying indexes.

**Benchmarks include a mixture of ICE BofA U.S. 3-month Treasury Bill Index, Barclays Global Aggregate X-U.S. Index, Barclays U.S. Aggregate Index, Barclays Multiverse Index., Barclays U.S. Credit Index, MSCI EAFE Net Index, Value Line Composite Index (Geometric), and the Barclays Global High Yield Index. These benchmarks are the same as those in the Risk/Return and Account Analytics sections of client quarterly performance reports. By comparing your portfolio’s return to the benchmark with the closest risk/return characteristics, you get a more accurate reading of portfolio performance than using a less diversified benchmark, such as the S&P 500 index.

ECONOMIC UPDATE

After the Fed meeting in June the chairman of the Federal Reserve, Jerome Powell, acknowledged that inflation was picking up, that higher inflation was expected for 2021, and that interest rates may have to be increased on an earlier timeline. However, he has also stated multiple times over the course of the quarter that the inflation we’re currently seeing is “transitory,” meaning some recent price increases are temporary in nature.

Commodities, such as lumber, were reflective of this concept. In anticipation of a slower economy, many lumber mills were not operating at full capacity. Instead, when the economy boomed – especially in the residential home construction sector – there was not enough lumber to keep pace with demand, causing prices to skyrocket almost 200% at one point during the quarter. In the month of June, we started seeing cash prices and futures drop significantly compared to all-time highs reached a few weeks prior.

With 47% of the U.S. population vaccinated, many states and businesses began lifting restrictions to fully reopen the economy. Consumer spending trended upward for the quarter, although, at a slower rate than Q1.

Overall, global reopening continued to progress throughout the quarter despite situations in a few countries growing significantly worse, such as India where only 4.2% of the population has been vaccinated. The UK, which implemented much more stringent lock down measures, has now vaccinated 49% of its population and saw a 9% month-over-month growth in retail sales with clothing sales growing an astounding 70% in May over the prior month.

In May, President Biden released his $6 trillion budget proposal that placed a high importance on strengthening infrastructure and substantially expanding the social safety net. He also commented that his tax plan, which notably includes increasing the highest tax bracket by 2.3% and increasing the capital gains rate on those with $1 million in income to 40%, would likely be retroactive for all of 2021 once passed. All changes, however, need to be approved by Congress before they can become law.

We continue to monitor portfolios, look for investments that meet our risk/reward targets for each of our clients, and make changes as necessary. For those of you traveling this summer, we wish you safe travels filled with joy.