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Second Quarter 2021 Investment Commentary

Second Quarter 2021 Investment Commentary

Exceptional growth in the U.S. driving up employment and prices

The U.S. economy, as measured by our Gross Domestic Product, increased by 6.4%* on a quarterly basis. Such a strong growth rate highlights our economic resilience, even though it is being measured against the lows of the pandemic. Employment increased, and the trend is expected to continue as offices and schools reopen.

Signs of pent-up demand are prevalent. It is hard to buy a house, fix a leak, find a cheap flight, or make a Saturday night dinner reservation. With demand increasing faster than supply, there have been price increases and shortages. For the first time in decades, consumer price inflation is in the news. While possibly a concern over time, most economists believe it is temporary and limited to goods and services in short supply (please see our blog on inflation for more details).

The first half of this year has been very positive for stock markets around the world

Global equity markets are up 12.3% over the first six months of this year as measured by the MSCI All Country World Index. U.S. stock markets appreciated more than international ones. Outside of the U.S., the more developed markets of Europe, the U.K. and Japan outperformed emerging equity markets such as China, Taiwan, and South Korea.

Within the U.S. stock market, for the first half of this year small company stocks appreciated more than large companies and stocks trading at lower valuations beat growth stocks.

We are retaining our broad exposure to all stocks with a slight emphasis to smaller companies, value stocks and companies reporting greater profitability, since we expect that these factors will continue to add value going forward.

Monetary policy over the next few years will be challenging

The U.S. Federal Reserve has indicated that despite the strong economic recovery to date, they will maintain monetary stimulus until further progress is made in employment. Once they are confident that our economy can sustain itself without stimulus, they will start to raise short-term interest rates and reduce the bonds they buy. While achieving a self-sustaining economy is important, the Fed’s challenge will be communicating the reduction in stimulus without creating unnecessary market volatility. Some of the past communications of less stimulus have led to temporary market drops described as “taper tantrums.”

Signs of rational thinking are returning to financial markets

Bitcoin dropped 41% in the second quarter. While it may go up again, it is equally likely to go down since there is no underlying value. As we have noted in the past, major financial markets accurately reflect the value of their underlying assets over time. Fads and social media hype may drive prices in the short term, but they don’t determine value in the long term. A disciplined approach of staying invested remains the best strategy.

Reflecting on the past eighteen months, we are reminded that unexpected risks exist, and that science and human innovation often find solutions. The pandemic taught us, once again, of the importance of risk diversification and avoiding the temptation to guess at short-term market moves.

* source: U.S. Bureau of Economic Analysis latest quarterly data, seasonally adjusted annualized return.

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