Q2 2021 Market Insights
Summer is in full swing here in Jackson, and we hope you have been enjoying the long sunny days just as much as we have. We’ve dusted off our bikes as we officially transitioned from spring to summer. A hot and dry start to the season unfortunately leads to increased fire danger and drought conditions, but the sunshine has allowed us to get out and enjoy one of our most favorite times of the year. We’ve been frequenting local markets as fresh fruits and vegetables fill the farm stands, attending events that were put on hold the previous year, and supporting local businesses. We take pride in supporting our community and have enjoyed seeing friends and neighbors out doing the same.
It’s been about a year since the global economy emerged from lockdowns and our local and national economies are running hotter than many of us have seen in our lifetimes. Globally, the U.S. and China have led the recovery as accelerating vaccine distribution drove increased consumer spending. This, along with a rise in private savings, low interest rates and record government support provided fuel for growth that could propel the 2021-2022 U.S. recovery to its fastest two-year pace since the mid 1960’s. The positive momentum helped push the S&P to finish the second quarter at a new record high but inflation and interest rate concerns remain top-of-mind for many investors. On a local level, national park visitation, lodging reservations and enplanements keep setting records, but many local businesses are struggling to find the employees needed to keep pace with the surging demand. Rising real estate prices and rent also continue to strain the local workforce, causing some businesses to reduce operating hours despite increased demand.
During the second quarter, markets continued to build on the prospects of a strong U.S. and global recovery. Strengthening jobs and manufacturing data, continued fiscal support through a new infrastructure bill, and rising consumer confidence helped the S&P notch a new record high finishing the quarter up 14.4% year-to-date. Ongoing threats of inflation led to bouts of volatility but markets proved resilient. Small cap stocks and commodities also experienced yearly gains as base metals and agricultural products posted decade-high prices. Many global benchmark equity indexes also set new record highs as corporate earnings ran to catch up with current valuations.
Looking to the second half of the year, the global economy is on track for its strongest growth since 1973, and the U.S. is well-positioned to lead the charge with GDP forecasts in the 7% range. A strong economic recovery is also expected to propel corporate earnings to record levels through 2021 into 2022. High growth levels fueled by pent-up demand are also forecasted to further constrain supply chains leading to higher inflation across consumer products and raw materials. However, signs of broader price inflation could be mostly short term and should ease as supply shortages fade and pent-up demand levels out. For fixed income, stronger growth should lead to the continued steepening of the yield curve. Overall markets are positioned for continued growth, but concerns over inflation and the speed at which the Federal Reserve begins to taper and raise rates may provide potential headwinds.
As the economy recovers, strong market trends can make for wide market divergences. Recently some trends of the past decade have begun to shift, further emphasizing the importance of diversification and a disciplined investment strategy. Cyclical stocks are showing more promise given current market conditions. Accommodative monetary policy, fiscal stimulus, and strengthening corporate investments should also support the materials, financials, and energy sectors. As for fixed income, investors should focus on short to intermediate duration securities to lessen the effects of interest rate exposure. Strong corporate earnings should continue to support dividend growth for income investors, and potential tax increases are likely to make municipal bonds more attractive. International equities and commodities have also historically underperformed throughout the last decade but favorable conditions point to forward-looking gains. As we move into the second half of the year, investors should put cash to work selectively and reexamine portfolios to align allocations with shifting marketing trends.
The global and local economy are flourishing but it’s proving to be not without its challenges. We believe investors should be mindful of current market conditions and make adjustments to portfolios where necessary. If you’re in Jackson, we encourage you to spend your dollars locally as creative, complex, collaborative solutions to our small mountain town’s rampant growth continue to evolve. Support the families and businesses that form the backbone of Jackson’s economy. After what was a challenging year for many, we’re strengthening our connections with family, friends, and acquaintances as the pace of daily life races to catch up with the economy. We hope you enjoy a safe, fun and exciting summer.
The Wind River Capital Management Team