By Megan Horneman. © Verdence Capital Advisors
- Inflation at 1980s levels.
- Labor market shortage is a concern.
- Bonds disregard growth and inflation pressures.
- S. indices make record highs in 2Q21.
- Commodities higher, but quarter-end challenges some.
We saw great improvements in the second quarter of 2021 regarding COVID-19. There was a vast difference from the beginning to the end of the quarter. We saw a change from more than 60k new U.S. cases per day to the lowest number of cases since the pandemic began. As we further put the pandemic behind us, we highlighted key economic developments in 2Q21 and how they translated into market performance.
- Inflation: Inflation dominated the headlines in 2Q21, with commodity prices surging. The Consumer Price Index jumped the most since the 1980s, and it is expected that most small business owners will raise their selling prices.
- Housing: Housing struggled in the second quarter due to new and existing sales rolled over as supply constraints and material prices propelled home prices to a new high.
- Employment: Jobless claims are back near the March ’20 lows, Labor shortages and wage increases are present because government benefits, COVID fears, and childcare restraints incentivize employees not to return to work.
- Consumer: Consumers currently have a record high net worth and savings rate. However, durable retail sales are declining as purchases shift from autos/electronics to services like travel, leisure, and eating out.
- Fixed Income – Fearing the Fed: Bonds recovered after the third-worst quarterly decline in history in 1Q21. Bonds ignored the economic data and inflation. They are instead focused on future growth if the Fed’s emergency support retreats. The Bloomberg Barclays Aggregate Index posted its best quarter in a year.
- Duration: Long-term bond prices rose as short-term bond prices fell to reflect future rate hikes. The 2YR Treasury yield rose to the highest since March 2020.
- Quality: Investment grade outperformed high yield. However, the yield on the high yield index fell to a record low.
- Global Equities – Cheering the reopening: The MSCI AC World Index rose for the fifth consecutive quarter in 2Q21. The U.S. led the gain compared to its global counterparts because of a faster recovery from COVID and better economic growth.
- Growth resumes leadership: All major areas of the U.S. equity market rallied in the second quarter. However, large-cap and growth outperformed value as interest rates declined and select inflation indicators softened.
- Splitting hairs between EM and developed equities: The MSCI EM and MSCI EAFE Index rallied a similar amount, but below the surface, the returns were bifurcated.
- Alternatives: Commodities peaking? The Bloomberg Commodity Index rose for the fifth consecutive quarter due to the surge in energy prices. Crude oil has jumped the most since last year as OPEC refused to increase production even though there was a spike in demand. Finally, lumber, an inflation indicator, surged over 90% through May but has since collapsed to end the second quarter.
This material was prepared by Verdence Capital Advisors, LLC (“VCA”). VCA believes the information and data in this document were obtained from sources considered reliable and correct and cannot guarantee either their accuracy or completeness. VCA has not independently verified third-party sourced information and data. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. This material is being provided for informational purposes only and is not intended to provide, and should not be relied upon for, investment, accounting, legal, or tax advice.
Past performance is not a guarantee of future results.
Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly in these materials will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. You should not assume that any discussion or information contained in this report serves as the receipt of, or as a substitute for, personalized investment advice from VCA. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. All indexes are unmanaged, and you cannot invest directly in an index. Index returns do not include fees or expenses.
By Megan Horneman