Global stock markets reached a new pinnacle, recording highs for the recovery from the 2020 market lows. For the S&P 500 Index, the second quarter 2021 was the fifth straight quarterly gain, a record not
seen since 4Q, 2017. The 8.5% gain for the three months, coupled with the prior four quarterly gains, was the second best run of consecutive quarters over 5% since 1954. The first half of 2021 was the second best showing for a six-month period since 1998. The NASDAQ composite was up over 9%, the Dow Jones Industrial average was up over 5% and the MSCI All country World Index was up over 7% in this most recent quarter. Despite inflation showing signs of strong emergence with the Consumer Price Index at 5%, 10-year US Treasury yields fell 27 basis points to 1.47% at the end of June. The FOMC continues to postulate that the current inflation rate is ‘transitory’, although the definition of this word is not neither defined nor clear in their minutes. More clarity maybe forthcoming in late August when the FOMC meets at its annual Jackson Hole conference.
Global central banks continue to support their currencies and their economies despite signs of economies returning to a ‘new normal’. While the FOMC is contemplating starting discussions about a reduction in their $120 billion monthly purchases of fixed income instruments, it hasn’t happened yet. We anticipate that reducing mortgage-backed bond purchases will come first, most likely at the beginning of the fourth quarter. A move to raise interest rates however, is unlikely until the FOMC ends its bond purchase program in late 2022.
Congressional spending continues unabated with the 2021 budget deficit expected to set a new all-time high, north of three trillion dollars. This number does not take into consideration any additional spending bill(s) that may be passed this summer. We anticipate a $500 billion-dollar traditional transportation/infrastructure bill will be passed in short order. Additional funding for non-traditional ‘infrastructure’ could be another $1.5 Trillion dollars although it is likely to be passed without bipartisan support.
As we noted in prior letters, we anticipate that market volatility should ramp-up further as we head into summer months. A possible correction in the global equity markets continues to be a concern for the late third into the fourth quarters of 2021. As the Covid-19 epidemic and its aftermath takes its toll on humanity, dislocation in global markets is highly anticipated, especially given elevated valuations and the manifestations of new, highly contagious variants. Our continuing search for undervalued assets requires patience. Until next quarter, stay safe and healthy.