- July 21, 2021
- Posted by: Terry Jack
- Category: Uncategorized
The good news for investors at the conclusion of the second quarter 2021 was it was more of the same! The same that is for continued appreciation in the overall U.S. stock market. Reasons for the appreciation include the historic liquidity supplied by the Federal Reserve over the last 12 months, the fear some investors had of missing out (FOMO) on big returns who jumped into the markets with their stimulus money and in addition a general confidence the battle against Covid-19 has turned with vaccination rates in the US now topping 50%.
Against this backdrop of investor enthusiasm and increasing worldwide confidence we would be remiss not to point out some of the many challenges the markets and investors may face moving into the second half of 2021 and beyond. The current administration has announced its intention to raise both corporate and personal tax rates and plan to do so on a retroactive basis. This is not law yet but certainly signals caution to investors. Yes, it is easy to tax the rich and demand billionaires pay a much higher individual rate than the average person. Unfortunately, the fact is without a viable reward for riskier investments like a lower capital gain tax, many high-net-worth investors will divert their personal wealth to safer and sometimes tax-sheltered opportunities and thereby decrease funding for new companies and in the end lower government tax collections.
Inflation could also pose challenges for investors in the second half of the year. The inflation debate is not whether prices will increase because they have but are the increases thus far in 2021 transitory or persistent? Federal Reserve Chairman Powell is in the camp that inflation is transitory and once supply chain issues from Covid’s impact and the stimulus money has been spent by the consumer inflation will slow. We hope he is right but have our doubts.
For the second quarter the S&P 500 Index returned 8.5% brining its’ year-to-date return to 15.2%. Unlike in the first quarter when value stocks, the great re-opening play, outperformed almost everything the second quarter saw a rotation back to the technology heavy growth index. The smaller company index, Russell 2000, moved higher by 4.3% and has outperformed the S&P 500 by 2.25% for the year and 21% for the trailing 12 months. Who says small stocks do not reward investors with big returns? Finally, those who advocate for more foreign equity representation in investor portfolios by calling attention to how much cheaper they are from a valuation standpoint should be happy because over the course of both the most recent quarter and first half of the year, you guessed it they got cheaper. The foreign index was positive but lagged the S&P 500 again.
Pivoting to interest rates and bonds the answer to fixed income investors most common questions is yes you can lose money in bonds. The rise in interest rates since the beginning of the year pushed bond prices down to the point their paltry yields could not fully offset the decline in bond prices. Interest rates did fall in the second quarter pushing the aggregate bond index to a 1.8% quarterly return, but the index is still down -1.6% year to date.
Heading into the third quarter investors will need to be mindful of additional inflationary pressures and related supply chain issues. In addition, we urge investors to be vigilant of China’s ability to influence commodity and stock prices. When it comes to China it is not a level playing field for investors.