Quarterly Commentary – June 2021

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During the second quarter of 2021 the US Equity Market continued upward and closed near all-time highs. The following are performance numbers from various popular indexes. Please remember index numbers are not individually comparable to a properly diversified portfolio. Each portfolio may include an allocation to securities similar-to these indexes in varying amounts based on your personal risk tolerance and should only be compared in that context. The S&P 500 was up 15.2% for 2021. The Dow Jones Industrial Average was up 13.8%. The Nasdaq Composite Index was up 12.9%. The Russell 2000 Index was up 17.5%. International equities as represented by the MSCI AC World Ex U.S. Index were up 9.2%. The MSCI Emerging Markets Index was up 7.5%. Fixed Income as represented by the Barclays Aggregate Bond Index ended down 1.6% for the year.

The markets rallied last year during the pandemic on optimism that better days would be ahead.  Better days are here now and with increased vaccinations, massive fiscal stimulus along with accommodative monetary policies, the re-opening of the economy has ushered an expansion that will reflect on an economy that is likely to have grown over 9% in the second quarter.  Tk:his is in turn helping Europe and the global economy rebound.  All relatively positive news for stocks and their outlook. The good news however is not evenly distributed across countries.  The financial markets are pricing a strong economic rebound for 2021 and into 2022, however weak April job numbers in the US and inflation data have not supported an ideal picture and could foreshadow some challenges ahead.

The concern about inflation which is highest in the US is causing expectation for hiking rates starting in 2023. The recent Fed meeting came off as more hawkish than markets expected.   The tone on the growth and the employment outlook was positive.  The forecasts for 2021 and 2022 core consumer price (CPI) forecasts were raised to 3% and 2.1% respectively.  Inflation is accelerating beyond what the trajectory was prior to the pandemic and inflation risks have become skewed to the upside.  We have seen labor shortages likely caused by the generous unemployment benefits and even with this higher unemployment rate, employers have had a hard time with hiring.  Even more significant is how the pandemic has affected the labor force participation rate, which is the percentage of working-age people who are working or looking for work.   That number which was on the decline until 2015 had started to come up, then dropped significantly in 2020 and has been treading water since. It has not returned to anything close to pre-pandemic levels.  The pace of people returning to the labor force has been disappointing and could stay at that level for a while.   Some obvious causes would be people opting to retire early but there also is a contingent of prime working age individuals constituting the bulk of the labor force who may not be coming back in the labor force near term absent a significant rise in wages.  This can provide some uncertainty on labor availability and hence the ultimate impact on inflation since labor costs are a significant component of pricing for goods and services.  There are a confluence of forces affecting inflation both in the short and long term, and in the long term there are secular deflationary themes that have been brought on by technology and globalization.  This presents a challenging environment for successful implementation of monetary policy and puts Fed policy error as a more significant risk as we put this pandemic behind us and unwind some of the excess liquidity.  This risk is a concern for our economy and the markets as we remain in uncharted territory. Adding to these unknowns are fiscal policy on the infrastructure plan, the funding through higher taxes on corporations and high-income individual as well as the endorsement of a global minimum tax scheme.  All these issues can make it challenging to predict the impact on the equity markets as they get shaped.

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