Something to Celebrate
The second quarter of 2021 saw strong market gains across nearly all asset classes—including an 8.6% rise in the S&P 500 and a 13.3% increase in commodities—driven by investor optimism about a "Goldilocks" economy with robust growth and easing inflation, despite ongoing challenges like COVID-19 variants, inflation spikes, supply chain disruptions, and labor market issues, with the Federal Reserve Bank of Atlanta estimating a robust 7.8% US GDP growth for Q2.
We hope you all had a fun and safe 4th of July! And while not wanting to take away from the celebration of our nation’s birthday, we think now is a great time to celebrate a remarkable second quarter for the markets. Consider that during Q2, the S&P 500 was up 8.6%, developed international market equities returned 5.6%, emerging market equities returned 5.1%, commodities were up 13.3% and the Bloomberg Barclays Aggregate – the benchmark for fixed income – was up 1.8%. Just about every market, asset class, index and sector we track produced a positive return for the April to June period.
At a high level, we think risk assets did so well during the quarter because investors came to see the economy as entering, to use an overused Wall Street analogy, a sort of “Goldilocks state.” In it, growth would remain robust but inflation, while very high, would likely prove fleeting, creating a dynamic where stocks, bonds and commodities could all catch a bid.
While we are very optimistic on the economy as we enter the second half of 2021, we don’t want to dismiss the challenges and uncertainties we continue to face. These include an unfinished vaccination effort, a fast-spreading variant of the coronavirus, the dramatic jump in inflation, disrupted supply chains and millions of Americans still out of the labor market.
All that said, we do see more good news than bad when we look across the economy and the markets and expect both to do well through the second half of the year. And to put a finer point on just how well the economy was likely performing through the second quarter, we would point out that the latest GDP Now estimate from the Federal Reserve Bank of Atlanta puts Q2 US GDP growth at an incredibly robust 7.8%.