The post March 2020 bull market extended through the second quarter.  There was concern in June that the Delta variant of Covid would reverse some of the vaccine-led progress as many remain unvaccinated and the Delta appears to be considerably more contagious.  The numbers thus far in July bear that out and has led to a rotation out of the reopening (read “value”) and back into some of the pandemic winners who benefit from a less open society.  The S&P Value Index (“SVX”) had a great quarter increasing by nearly 5%, but that trailed the S&P 500 (“SPX”) which was up over 8% with nearly all the difference coming in June when there was a clear rotation from value to growth.   

Earnings and confident company outlooks contributed to the ebullient market.  Most companies’ financial results came in well ahead of what analysts projected for the first quarter (reported in April and May) and most companies that did provide forecasts expected good earnings to continue throughout the balance of 2021.  One concern they had were supply constraints and inflation for both material inputs and labor.  Many businesses struggled to find workers or had to offer signing bonuses and higher wages to find and retain rank and file employees.  Inflation numbers during the quarter came in at numbers not seen since the recovery from the great financial crisis of 2008 and the Federal Reserve Board members and the investment community debated whether this inflation was “transitory” or whether it will be a long-term issue requiring Fed action, to which markets typically react poorly.

A couple of concerning excesses that I touched upon in last quarter’s letter, namely the “meme” stocks like GameStop, AMC Theatres et al, as well as cryptocurrencies like Bitcoin and Etherium lost momentum during the latter part of June and declined by more than half from their peak values as of this writing.  Also, lumber prices, which had become a huge issue for home affordability, have declined over 60% from the highs reached in May.  A positive sign is that the equity markets have held up well, which hopefully confirms my thesis that most of these speculative excesses were generated by small retail investors (aka the “Robinhood crowd”) and their declines may not necessarily bode poorly for the broader market. 

The market now awaits the outcome of the infrastructure plan and the proposed budget which includes meaningful expansions of social, climate change and environmental programs.  The final size of these plans and budgets will affect the markets view of both economic growth and inflationary pressures and it is anyone’s guess as to how the investment community will react to these conflicting pressures.  The Fed is keeping a close eye on inflation with the hope that it is indeed transitory and will not require adjustment to their current near zero interest rate policy and bond buying authorizations.  While the market has driven down interest rates recently, inflation protected securities have done very well and I continue to hold them as a meaningful portion of fixed income allocations.

I hope you are all enjoying the summer and should you have any questions about the attached report, this email, your portfolio, or anything else related to your financial life, my line is always open.

Best regards,

Steve