2Q21 MARKET OVERVIEW
The impressive global recovery heated up in the second quarter as renewed optimism and pent-up consumer demand resulted in exceptional corporate earnings. Inflation concerns surfaced but were overshadowed by the significant monetary and fiscal stimulus which has provided indisputable support for consumers and businesses while protecting economic prosperity.
Moving forward, attention will turn to robust equity market valuations and whether corporate profits and economic growth can keep pace with expectations. Headwinds could include inflation, a spike in Covid-19 cases, higher taxes and tighter monetary policy. Regardless of the market direction, our disciplined process will utilize market changes to shift towards our target allocations in the most tax-efficient manner possible while maintaining your desired risk level and fulfilling your cash flow requirements.
U.S. Equity Markets
U.S. equity markets extended impressive year-t0-date gains with the Russell 3000 adding another 8.2% during the quarter. With roughly 50% of the population vaccinated, extraordinary consumer demand led to further market gains and fueled inflation. In May, consumer prices increased 5.0% on a year over year basis. At this point, it is too soon to tell if this alarming inflation lift was the result of supply chain transition issues of restarting the economy or more permanent factors that will need to be dealt with by the Federal Reserve. As asset prices surged, U.S. household wealth increased $20 trillion since the fourth quarter of 2019 and consumer confidence reached a 15-month high. In addition to these developments, the U.S. economy added 850,000 jobs in June and the unemployment rate rose slightly to 5.9% according to the U.S. Bureau of Labor Statics. The U.S. expansion trajectory continues to look bright, especially if Covid-19 can be contained.
International Equity Markets
International developed equity markets finished the quarter with a 5.2% gain for the MSCI EAFE. A renewed focus on the Eurozone rollout of Covid-19 vaccinations helped ease restrictions and jump start their economic recovery. The Eurozone services and manufacturing sector PMI reading reached 59.2 in June which is the highest business activity expansion reading in fifteen years. Japan’s sluggish vaccine rollout resulted in market underperformance since only 15% of their population received vaccinations. A spike in Covid cases also extended Japan’s state of emergency into August. With the Tokyo Olympics kicking off this month, Japan needs more positive news to boost consumption and catch-up with the developed world. The MSCI emerging markets rose 5.1% during the quarter. Concerns about the slow rollout of Covid vaccinations is restraining recovery efforts, however, this trend should reverse in the second half of the year. Both developed and undeveloped international markets look more attractive from a valuation perspective compared to U.S. markets.
Fixed Income Markets
Safety-minded investors experienced positive results as the closely watched Barclays Aggregate gained 1.83% during the quarter. Federal Reserve Chairman Jerome Powell boosted bonds with his dovish June comments stating that the central bank will do everything it can to support the economy for as long as it takes to complete the recovery. These comments helped relieve short-term concerns as the 10-year Treasury retreated during the quarter from 1.74% to 1.45% on June 30. Given the yield decrease, it is not surprising that longer dated US Government securities recovered considerable value. The Barclays US Government Long posted a 6.43% quarter gain, Intermediate 0.62% gain and Short 0.04% loss. In the international fixed-income arena, the JPM Non-US Unhedged gained a modest 0.38%. The Barclays Municipal finished the quarter with a gain of 1.42% as tax-sensitive investors refocused their attention on the likelihood of higher taxes on the horizon.