Market Data for the quarter ended June 30, 2021:
- S&P 500 Stock Index: 4297, up 8.2%
- Ten-year Treasury Note Yield: 1.44%, down .31%
- Gold: $1,771 per ounce, up 3.7%
- Oil: $74 per barrel, up 24.6%
Stocks put in another impressive quarter of gains in the second quarter of 2021. Corporate earnings growth impressed, while the economic recovery from the pandemic came to be regarded as one of the “Goldilocks” variety: strong enough to grow earnings, but weak enough to keep inflation and interest rates low.
On inflation, while inflation readings came in above expectations during the quarter, the market consensus settled on elevated inflation being temporary. As such, yields on long-term Treasury notes and bonds dropped significantly, contrary to expectations. The market’s benign view of inflation gave it reassurance that the Federal Reserve would not be quick to withdraw its over the top “emergency” monetary accommodation.
The current state of financial markets can be charitably described as “irrational exuberance.” Between the forced savings from pandemic-necessitated economic shutdowns, over the top financial and monetary policy support, and zero commission trading, markets have been flooded with an unprecedented tidal wave of retail investor money. This money has turned markets upside down. Whereas over the long-term, moderately valued shares in high quality companies have generated the highest returns, in today’s retail driven markets, the most speculative and expensive assets have led the way.
Highly speculative crypto “currencies,” profitless companies often teetering on the brink of bankruptcy, and glamorous mega-cap growth companies trading at nosebleed valuations have generated the highest returns over the past fifteen months. This is because retail investors are driven primarily by excitement and momentum. The upshot is a market that makes little-to-no effort to determine what assets are worth.
It is said that an insane world, madness looks moderate, and sanity looks radical. That is the investment world we find ourselves in today. How long this will continue to be the case is difficult to surmise. Our view has been that a powerful economic recovery would drain capital from financial markets, drive up bond yields, and tighten liquidity.
As alluded to in the first paragraph, the recovery from the pandemic has been solid, yet it has not altered the uber liquid, low yield environment that has proven to be rocket fuel for speculation. The one thing we are certain of is that this speculative frenzy will NOT go on forever. When it ends, the naïve and reckless will pay a heavy price, while the “radically sane” will emerge largely unscathed and pull ahead on the return tables. While our expectation is that the market conditions described above will continue into the third quarter, the ongoing economic recovery from the pandemic may accelerate and drive inflation expectations and bond yields higher, likely putting stocks under pressure.
Finally, the pandemic, while waning in the United States, has not been brought to a conclusive end and a potential resurgence moving into the fall cannot be ruled out. If a significant resurgence were to come to pass, market expectations for growth and inflation could be significantly altered with knock on effects for share prices.
For the remainder of 2021, we see the stock market, as represented by the S&P 500 stock index, to trade in a range of 4000 to 4600. It closed the second quarter at 4298.
We appreciate the trust and confidence you have placed in us. We are always available to discuss your asset allocation and the investment environment more broadly, so do not hesitate to contact us with your questions and concerns.