Quarterly Market Review: Q2 2021
InvestingPretty much the whole world thinks that U.S. GDP growth for 2021 will be at least 6.5%, with the consensus at 7% or slightly above. The last time we saw calendar year GDP growth above 7% was 1984. It was 7.2% then. Before 1984, you have to go back to 1955, and before 1955, it was an 8.7% post-war bounce in 1950. Our current growth rate, measured at 7.8% by the Atlanta Fed’s GDPNow forecast, puts 2021 in rarified company. We now have as many job openings as job seekers. In April of last year, there were five seekers for every opening.
Despite accelerating inflation, periodic volatility and slightly hawkish comments from the Fed, stocks were generally supported by continued central bank support and corporate earnings strength, along with fading effects from the pandemic. The large cap S&P 500 Index responded to the rapidly reopening economy with a quarterly return of 8.5% and a sparkling first half-year return of 15.3%, the second-best half-year return since 1998. Since 1979, the S&P 500 has gained 10% or more, 16 times during the first half of the year. During these years, the index has gone on to average a 7.9% gain over the second half of the year.
Worldwide stock returns were mixed in June, with the U.S. leading global market returns. Strength in the information technology sector largely drove results. Quarterly stock gains were widespread, but the U.S. generally outperformed other developed nations and emerging markets. Global corporate earnings results and forward estimates generally remained upbeat amid improving economic data.
The broad U.S. bond market also advanced for the month and the quarter, boosted by corporate bonds and Treasuries. Ten-year government bond yields rose sharply in the first quarter on inflation scares, only to reverse part of the rise in the second quarter as the market seemed to gain confidence. In the Fed’s view, the rise of inflation is transitory. With treasuries yielding 1.5% with implied inflation at 2.3%, the real yield is negative– investors lose purchasing power over time. At the same time, the additional yield received from corporate credit has decreased as credit spreads are at low levels. Investors either must accept low yields for the foreseeable future or venture out on the risk spectrum and be exposed to higher drawdowns in more equity like asset classes.
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