As investment markets close out the first half of 2021, we want to give a recap and our view of the landscape.
2020 was the year of the pandemic and recovery. As the pandemic spread, the world entered a near complete lockdown and economies and investment markets plunged. Of course, you know the rest of the story. Governments provided massive liquidity to prevent a complete seizure of world economies. Those actions, together with the surprising strength of people and technologies, softened the blow and markets recovered. With the development and distribution of vaccines, commerce rebounded and markets surged higher.
2021: So Far, So Good; The Advance Continues
Stocks finished the first half of 2021 with a strong advance, closing out June with a new record high. The gains off the lows of March 2020 have been both powerful and sustained. This marks the fifth consecutive quarterly advance. There are several reasons for the continued strength, including accelerated vaccination rates and higher than expected corporate earnings.
Investing and Speculating
The surging markets over the past 15 months have caused some interesting behaviors. Emboldened by strong returns in traditional investments, some have sought even riskier strategies. Many have poured into so-called “meme stocks” promoted on social media. Interest has also grown in cryptocurrencies as well as blank check companies, also known as SPACs. Many of these are sponsored by sports and entertainment figures. While these stories make for interesting reading, this is not a new phenomenon. Some will be tempted to speculate during periods of strong recoveries. Some will make money and others will not. But at the end of the day, we know investing isn’t about the next big thing. It is about finding the right thing for you.
What to Watch: Inflation and Interest Rates
You may have seen that many inflation measures have increased dramatically in 2021. In fact, the Commerce Department recently reported one measurement increased the most since the 1990s.
Of course, there is another side to this. Remember, the pandemic effects on the economy were event driven. Demand suddenly dropped but restarted quickly, which can lead to supply chain and other issues that can dramatically affect prices. Perhaps some of this is already beginning to abate. At one point, lumber prices soared over 60% this year. Recently, as supply normalized, lumber gave up all the gains and recently was down 18% for the calendar year. This is another sign that the sudden reopening of the economy has created inflation distortions that may not be lasting. Either way, we will be closely monitoring the data for some time to come.
Interest rates have also been on the minds of investors. It was feared that the Fed might raise interest rates sooner than previously expected due to the strong recovery. This would cause rates to rise, potentially pushing stocks and bond prices down. During the second quarter, the Fed announced that they had moved up their inflation expectations and therefore expected to begin raising rates sooner than later. So far, the market reaction was actually the opposite of what conventional wisdom expected. Stocks jumped to new highs and interest rates dropped significantly. You can’t make this stuff up.
Domestic Equities: As vaccination rates rose and the world began to transition to normal, the S&P 500 gained 8.5% for the second quarter and returned 15.3% for the first half of the year. Smaller U.S. stocks were also strong, up 4.3% and 17.5% for the quarter and first half.
International Equities: Foreign stocks also turned in strong results. The MSCI EAFE, an index of large company stocks in developed countries, rose 5.2% for the quarter and has increased 8.8% year-to-date. Emerging markets also joined in the gains, increasing 5.0% for the quarter and 7.4% for the first half.
Fixed-Income: Unlike stocks, bond returns have not been a straight up story in 2021. Bond prices slumped in the first quarter as interest rates rose. As rates fell in the second quarter, prices rose again. The Barclays Aggregate Index edged up 1.8% in the second quarter, but is down 1.6% for the calendar year.
Our optimism is not inherited. It is acquired through experience and is mathematically based. According to Warren Buffett, Winston Churchill and many others, optimists generally do better than pessimists. Plus, they are more fun to be around.
The pandemic and recovery were difficult for people and markets. One had to show restraint, discipline and optimism that the world and portfolios would survive and prosper. This was no easy task but together, we did it.
As we move forward, we will face different challenges. The world will not be the same after COVID, and businesses will have to continue to adapt. Perhaps most importantly, economies around the world will have to transition from being supported by stimulus and low interest rates to standing on their own power. As investors, we will need to be vigilant and adapt to these changes. We are here and ready.
Thank you for the trust you have placed in us. If you need anything or if you would just like to talk, give us a call.
ELS Vision Wealth Management helping at the Harmony CDC Food Pantry on June 28, 2021.
Lawrence Smith, CFP, CRPC, CRPS
Lawrence Smith, CFP, CRPC, CRPS, is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. ELS Vision Wealth Management is not an affiliate of Lincoln Financial Advisors.
Sources of data- Wall Street Journal, CNBC, FactSet, S&P Global, MSCI, Russell, Bloomberg. The performance of an unmanaged index is not indicative of the performance of any particular investment. It is not possible to invest directly in any index. Past performance is no guarantee of future results. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Three-year performance data is annualized. Bonds have fixed principal value and yield if held to maturity and the issuer does not enter into default. Bonds have inflation, credit, and interest rate risk. Treasury Inflation Protected Securities (TIPS) have principal values that grow with inflation if held to maturity. High-yield bonds (lower rated or junk bonds) experience higher volatility and increased credit risk when compared to other fixed-income investments. REITs are subject to real estate risks associated with operating and leasing properties. Additional risks include changes in economic conditions, interest rates, property values, and supply and demand, as well as possible environmental liabilities, zoning issues and natural disasters. Stocks can have fluctuating principal and returns based on changing market conditions. The prices of small company stocks generally are more volatile than those of large company stocks. International investing involves special risks not found in domestic investing, including political and social differences and currency fluctuations due to economic decisions. Investing in emerging markets can be riskier than investing in well-established foreign markets. The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The Russell 2500 Index measures the performance of the 2,500 smallest companies (19% of total capitalization) in the Russell 3000 index. The S&P 500 index measures the performance of 500 stocks generally considered representative of the overall market. The Wilshire REIT Index is designed to offer a market-based index that is more reflective of real estate held by pension funds.