Global Economies and Markets
Q2 2021 market update: the quarter was characterized by economic recovery. Businesses resumed reopening and pandemic restrictions eased. CNBC reports that an estimated 67% of Americans will have received at least one COVID-19 shot by the July 4th holiday. This figure is short of the 70% figure targeted by the Biden administration for the holiday date but is still enough for many Americans to feel comfortable traveling at a pace not seen in over a year. Airline traffic improved sharply in the quarter, with some airlines reporting booking levels not seen since 2019. Many states removed mask safety mandates by quarter’s end. The most recent CDC data indicates the number of new COVID-19 cases has fallen to March 2020 levels.
Economic optimism helped push capital markets higher through the quarter. The S&P 500 ended June with its 34th record close of 2021 and the second best starting half performance since 1998. The index rose over 15% year to date. Investors have pointed to any number of positive factors to justify the optimistic equity market environment. The heavy pace of government stimulus since the pandemic’s start has provided economic support. A strong housing market has buoyed investor confidence, including the strongest home price gains since 2005. Jobs reports also added positive news, including the most recent May data that indicated new payrolls doubled from April. Consumer confidence readings reflected this positivity and reached a 16-month high in June.
Value stocks, which tend to have healthy dividends and comparatively low valuations, started the year with strong performance. By Q2, growth stocks were once again in favor. This latter group benefits from a low interest rate and a recovering economic environment that can often produce growing corporate revenue and better earnings. The benchmark indices highlight this trend reversal: The Russell 1000 Value Index returned 5.2% in the quarter compared to the 11.9% return of the Russell 1000 Growth Index. Large-cap and mid-cap stocks outperformed smaller companies in the quarter, while the Information Technology, Energy, and Telecommunications sectors rose double digits.
Economic data in the U.S. continues to be mixed. Unemployment data has improved, though inflation remains the key area of focus for investors. Upward pressure on wages and raw materials is creating a difficult environment for businesses to navigate. Labor availability will be a key factor to watch as the recovery unfolds.
Non-U.S. markets lagged U.S. results. The U.S. has one of the highest vaccination rates in the world, which has contributed to our faster recovery. This strong domestic upturn has fueled a valuation gap between U.S. and international markets: Entering Q2 the price/earnings ratio of international stocks was 25% below domestic markets. Looking forward, a weak-dollar policy from the Fed, strong global stimulus, and comparatively expensive U.S. stocks could contribute to non-U.S. market attractiveness. Russell points out the existence of a 62% price premium in U.S. markets compared to their long-term average, in contrast with just 30% premium in the world outside of the U.S. The cyclical composition of non-U.S. markets also positions them to benefit from a global re-opening.
Bond performance has been challenged so far this year. The Bloomberg Barclays U.S. Aggregate Bond Index, which is a barometer of the broad bond market, has lost more than 1% year to date. Bond returns come from both changes in income and changes in price, so low interest rates and weak pricing in 2021 have created a tough return environment. Despite less than stellar returns year-to-date, the diversification benefits of fixed income are still valid as part of a diversified portfolio strategy.
2021 has already shown signs of promising strength, but inflation remains a key concern. The Federal Reserve’s inflation expectations have trended upwards, and now anticipate price increases of 3.4% in 2021. The current messaging from policymakers is that interest rate hikes are still not likely before 2023. Investors have some time to assess the meaning of these new expectations.
What Does This Mean For You?
We believe 2021 offers you a fresh opportunity to evaluate your financial picture. Domani Wealth can be by your side to help you have peace of mind as we navigate the pandemic recovery together. Prudent diversification and careful planning are key to navigating challenging environments, including the recovery we believe is now well underway.
This is the time when having an advisor like Domani Wealth that is focused on your financial goals can really make a difference in your long-term financial plan. We view the current environment as an opportunity to revisit strategic portfolio allocations, take a look at cash needs, make portfolio shifts to minimize tax liability, and review long-term goals. If you have any questions or would like to meet and review your financial situation, please call our office for an appointment.
Data sources: Bloomberg, NASDAQ, Callan Independent Adviser Group, Russell Investments, J.P. Morgan Asset Management