Macroeconomic View & Markets
Global equities continued to rally throughout the quarter. They reached all-time highs again in late June, as measured by the S&P 500, supported by an accelerated roll-out of Covid-19 vaccines leading to a continued reopening of the global economy. Approximately 50% of the U.S. and European populations were fully vaccinated by mid-June. The Federal Reserve continues to be accommodative despite higher inflation data. (Susan’s column) Their dovish, “easy,” monetary posture will eventually end as rates will have to rise to meet economic demand. It is one of the many fiscal and monetary factors we monitor for portfolio positioning. In late June, bipartisan support was reached for a $1.2 trillion infrastructure package to upgrade roads, bridges, and broadband networks over the next eight years. If approved by Congress, this should also lead to additional economic growth.
Due to these positive factors, the market posted its fifth consecutive quarterly gain (measured by the S&P 500), the longest streak since Q4 of 2017. The ‘risk on’ stance has continued since the pandemic lows last spring for all risk assets. Real estate has been the winner this year. It led all equity categories for the quarter and year-to-date. Keep in mind real estate was the worst-performing in 1 and 5-years. This is why it’s prudent to buy more, not sell, positions while their prices are down. Small-cap U.S. stocks led for the 1-year, while large-cap U.S. stocks led in all other periods. Foreign equity, which has given good returns, lagged U.S. stocks year-to-date, 3, 10, and 15-years, however, our actively managed foreign fund has outperformed the index. We remain constructive on foreign equity.
In bonds, high yield corporates continued to lead in all periods, while aggregate bonds were the laggard year-to-date and in the 1-year. Cash continues to be the worst-performing category in all other periods. Again, we do not invest in the index but in diversified funds that own a variety of types of bonds, including corporates, municipals, and governments. These positions dampen volatility, which is why we insist that all portfolios have some allocation to bonds.
This constant change in volatility and asset class leadership is why we believe owning a diversified portfolio of bonds, equities, and liquid alternatives is crucial to achieving your financial goals. As always, time in the market is more important than timing the market.
As a reminder, we currently invest primarily in actively managed funds due to their outperformance of their indexes so the index returns above should only be used as a very broad point of reference.
The global recovery has been ongoing for over a year, and economic data continues to improve. The current unemployment rate is 5.9%, after peaking at 14.7% in April of 2020. Initial jobless claims (newly unemployed) for the week ending June 26th, fell by 51,000 to 364,000, which brings the four-week moving average to approximately 392,000. This is a pandemic low, down by about 50%, but still above pre-pandemic levels. Continuing claims (longer-term unemployed) are also trending down to below 3.5 million after peaking at 25 million in late May 2020.
As of May, 2021, there were a record 9.21 million job openings in the U.S., reflecting a tremendous demand for labor as the economy reopens and businesses scramble to keep up. In June, 850,000 new jobs were created in the U.S. However, 3.6 million workers quit their jobs in May but this was an improvement over the record 4 million in April as many job seekers sought better-paying jobs, making it difficult for employers to find both skilled and unskilled labor. Slowly healing, unemployment projections are 4.5% at year-end. The Fed estimates it will take until 2023 to reach the 50-year, pre-pandemic low of 3.5%. THEN, the focus will shift back to inflation. (Susan’s column)
The U.S. economic output, Gross Domestic Product, grew at an annual pace of 6.4%. The Fed predicts an annualized rate of 7% throughout 2021, the fastest pace since 1984, as businesses continue to reopen and consumers get out of their homes and spend.
With all this spending, corporate earnings continue to impress. Of the S&P 500 companies, 86% have beaten their earnings estimates (EPS) for Q1 2021; 74% have beaten revenue estimates. Many of these companies, including big tech, reported blowout earnings as part of the stay-at-home trade, thus our tactical overweight in technology.