Summer 2021 Market Commentary
By Marc Usem
As you are reading this, we are officially in the “Dog Days of Summer.” The summer is when many investors, traders, and fund managers take vacations. This is particularly true this year, as we emerge from Covid. No one knows if the market will also take a break after the incredible rise in the second quarter of 2021. The U.S. stock market, as measured by the S&P 500 Index, was up 8.37% for the quarter. To put the current growth in context, the long-term average return for the stock market is roughly 9% per year. In other words, last quarter’s performance was roughly the equivalent of an average full-year return! This is on top of the first quarter’s gain of 6.2% totaling 15.25% for the first half of 2021. As has been the case for most of the past eleven years, both international markets and emerging markets lagged the U.S. during the second quarter. The driving story for the quarter was the rapid vaccination rate in the U.S. and the related restart of the economy. Due to actions by Congress and the Federal Reserve, money supply increased by about a third, meaning people had more money to spend. We often heard statements along the lines of “Yes, my home improvement project is much more expensive than it should be due to rising prices, and yes, I’m going ahead and doing it anyway.” The increased spending resulted in an impressive 53% increase in first quarter corporate earnings. Second quarter earnings estimates are expected to grow by 63% from the depressed levels of 2020. (Note: the third and fourth quarters of 2021 are expected to see more modest gains of about 20%.) So, consumers have money to spend and intend to enjoy life post-Covid.
The other major news item came from the Federal Reserve. Noting some potential inflationary pressures, they moved forward their time table for potential rate increases to 2023 (still two years away). Their announcement caused the yield on 10-year treasuries to drop by 0.29% to 1.45%, leading to positive returns in bonds during the quarter. We would expect the Federal Reserve to curtail bond purchases before raising rates. The Federal Reserve is still buying about $120 billion of treasury- and mortgage-backed bonds per month. Despite the Fed warning, and some worried bond investors, volatility for equity investors dropped back to pre-pandemic lows as markets rose.
While fiscal and monetary stimulus continues to course through the economy, all seemingly looks good for now. However, we warn investors not to become overly complacent. Questions about inflation have flared and continue to be debated as the next hot topic. It is also too early to tell the potential impact of the Covid Delta variant. We do believe that taxes will increase in the future, and that economic growth will markedly slow down once the consumer spending splurge comes to a natural end.
We think that markets in the short run have the potential to continue to move higher. However, our long-term stock and bond projections are much more muted. We continue to warn investors to stay away from meme stocks, or “the sure thing,” particularly the various investment flavors of the moment. We worry that market sentiment and expected returns by market participants is still too high. With U.S. stock market gains of 40% in the past 12 months and valuations extended by most historical measures, we do not believe this is a good time to take on extra risk. We strongly recommend that you stay the course in a tried and true, globally-diversified strategy with the money that is committed to your long-term plans.
Thank you for your continued confidence in our work.
The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Past performance is no guarantee of future results. To discuss any matters in more detail, please contact your financial advisor.
