Q2 2021 Market Overview
Market Recap
The U.S. continued to lead the global reopening trend with second quarter GDP expected to grow over 9%.[1] The U.S. is on track to print real GDP growth above 6.5% in 2021 with a forecast of almost 4% in 2022.[2] Strong growth led to meaningful second quarter performance as the S&P 500 and MSCI indexes rose 8.55% and 7.39%, respectively. Small cap stocks as measured by the Russell 2000 index took a relative pause for the quarter rising 4.29%, but finishing the first half of the year up 17.54%.[3] Overall economic activity is surging and beginning to expand globally, corporate and household balance sheets are healing, and U.S. economic output should surpass pre-pandemic levels during the third quarter.
As the year began, heightened inflation fears became a focal point for investors, leading to a sharp rotation from growth to value stocks during the first quarter. Much of that trend reversed during the second quarter as inflation fears began to fade and growth stocks resumed their outperformance. As a result, the yield on the bellwether 10-year US Treasury declined from 1.75% to 1.44% to conclude the quarter.[4]
Given the U.S. has led the global economic recovery, we have likely seen growth and inflation peak in Q2. At this stage, the largest downside risk remains prolonged supply chain disruptions that impede production and employment growth, eventually pushing up prices for an extended period. However, we anticipate the recent inflation surge will ease as global production dislocations and supply chain bottlenecks are overcome as the global economy reopens. We expect any meaningful U.S. interest rate rise to be relatively muted by accommodative Fed policy and the global demand for yield.
While the U.S. economy is trending toward the mid-cycle phase, other developed markets, such as Europe, remain early in the economic recovery cycle. As vaccination rates rise, we anticipate corporate and consumer spending will unleash meaningful pent-up demand outside the U.S. Therefore, we anticipate that global growth will remain strong for the next several quarters as the reopening trend continues to spread globally.
We enter the second half of the year with our asset allocation framework continuing to register a decidedly positive market environment for equities and risk assets. We continue to favor a risk-on posture relative to our strategic benchmarks with a tactical overweight to the U.S. and small-cap equities. Additionally, we recently increased exposure to developed non-US equities. We remain underweight traditional fixed income with an emphasis on flexible and opportunistic bond strategies. We have a modest underweight to duration and an overweight to credit reflecting the strong economic backdrop for the consumer and corporations. Until the data and evidence change course, we view any near-term volatility as healthy and an opportunity to tactically buy equities. We expect a tailwind to persist in risk assets for the remainder of the year.
Crypto Spotlight
We thought it was appropriate to briefly comment on the crypto market given it feels like everywhere you turn there is a headline or press coverage on the topic. Also, the crypto market experienced an extreme bout of volatility during the second quarter. Core to the market and synonymous with crypto currency is Bitcoin, which experienced its third-worst quarter in price performance. For further context, Bitcoin has had three 80% drops since 2012 and is in the middle of a 40% decline as of quarter-end.[5]
While thinking of Bitcoin as a currency or medium of exchange at this juncture is limited given its volatility, we have chosen to focus on the investment merits of the underlying infrastructure or blockchain technology. While still a nascent industry, blockchain is a distributed database that maintains a continuously growing list of records, secure from tamper and revision. In practice, blockchains provide a way of achieving consensus on the state and history of a database, without requiring trust between parties.
Despite the industry being in its early innings, there are a wide range of industries that will be materially impacted by blockchain technology ranging from finance, privacy and security, data storage, healthcare and many more. In addition, there have been some meaningful investments by prominent large businesses in the application of the underlying technology. Given the long-term impact of the technology, the growth and adoption of blockchain technology may be analogous to the lifecycle and torrid growth of the internet. Some posture that the current stage in blockchain’s evolution is comparable to the dial-up internet era. While the future is unknown, the infrastructure and application associated with the technology has the potential to be thought of as the “internet of the future”.
1 Ned Davis Research
2 The Conference Board
3 Morningstar Direct
4 Morningstar Direct
5 CoinDesk
Disclosures:
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Economic factors, market conditions and investment strategies will affect the performance of any portfolio, and there are no assurances that it will match or outperform any benchmark. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss.
New World Advisors, LLC ("New World") is a Registered Investment Advisor ("RIA") with the U.S. Securities and Exchange Commission (“SEC”). New World provides investment advisory and related services to clients nationally. New World will maintain all applicable notice filings, registrations and licenses as required by the SEC and various state regulators in which New World conducts business. New World renders individualized responses to persons in a particular state only after complying with all regulatory requirements or pursuant to an applicable state exemption or exclusion.