2021 Second Quarter Commentary

It’s hard to believe but we’re halfway through 2021 already!

We’ve made it through fireworks, flash floods, hot weather, and whatever else has come our way over the last few months.

It appears that COCID vaccines can control the worst impacts of the virus. For many, the Fourth of July Weekend was a return to some much-needed normalcy.

The S&P 500 was up 14.4% in the first half of 2021, which I understand to be one of its strongest first halves.

Although there may be valid concerns about the pace of the stock markets climb, corporate earnings have been on a similar pace, which makes the current valuations sustainable, at least for now.

But not to worry, the market has found plenty of things to put on its worry list:

Inflation – The CPI is up much more than we’re used to on a year over year basis. But is this transitory, due to supply chain issues or other short-term factors? For now, the smart money seems to be suggesting it will be around 3% or so for the rest of 2021 then work back towards 2% next year.

Interest Rates – They’ve had a relatively large upward move since the beginning of the year but have slipped in the last few weeks. As an example, using the ten-year US Treasury Note, it’s yield started the year just under 1%, got as high as about 1.75%, and now its trading around 1.3%. {I know – on an absolute the basis this doesn’t amount to much, but on a relative basis, these are big moves}

Fed Policy – Another factor is when will the Fed end its current bond buying program. For the most part, the market wants it to be later, but there could be pressure for sooner if inflation doesn’t settle down.

Employment – Right now employees have the upper hand as employers are scrambling to re-staff their businesses. It is my understanding that employees are feeling so empowered that the “quit-rate” is at a
2nd Quarter 2021 remarkably elevated level. The availability of childcare is another factor that may be an ongoing issue at least until school begins again this fall and the pressure on day care eases.

International Pandemic Situation – The ‘Delta Variant” seems to be impacting both developed and developing countries especially those that have had limited success vaccinating their citizens.

China – This is a two-sided coin. It is well on its way towards its economic recovery, which is good for trade. But on the other hand, they continue to fully exploit their use of central planning to challenge capitalism.

Russia – I don’t know if their government is directly involved in the current rash of cyber-attacks, but this is something that has to be contained.

So, situation normal, lots of challenges mean lots of opportunities. But, is the current economic path transitory or sustainable?

I expect “things’ will be fine in the second half of 2021, maybe not as good as the first half, but fine, nonetheless.

❖ The current vaccines will most likely minimize the devastating impacts [hospitalizations, death] of the new variants with widespread adoption.

❖ As we get closer to school opening this Fall, the vaccination level will increase.

❖ Inflation will continue to moderate. It may be slightly higher than we’ve been accustomed to but nothing like the 1970’s.

❖ Interest rates will remain at historically low rates and will therefore remain stimulative for the economy.

❖ The employee / employer dynamic will most likely swing back to the employer sooner rather than later.

❖ I think we will get smarter regarding our issues with China and Russia.

Here’s hoping for a solid second half!

July 9, 2021