Index	2nd Quarter	1 YR
S&P 500 Large Cap Index	8.17%	38.62%
S&P Small Cap 600 Index	4.21%	65.27%
S&P Developed BMI International Index	6.82%	39.02%
S&P U.S. Aggregate Bond Index (total return)	1.78%	0.01%
S&P Municipal Bond Index (total return)	1.50%	4.20%
Dow Jones Equity All REIT Index	11.14%	28.75%
Dow Jones Commodity Index (total return)	12.81%	52.19%

SOURCE: DOW JONES, DATA AS/OF 6-30-2021 (DOESN’T INCLUDE DIVIDENDS UNLESS NOTED). HERE IS A COMPREHENSIVE LIST OF RETURNS.

So, What Took Place?

As it pertains to the second quarter of 2021, vaccination campaigns accelerated in Europe as it is now catching up with the U.S. Most governments continued to ease COVID-related mobility restrictions and activity levels picked up. The result has been very strong economic data around the world. Emerging economies (China, India, etc.) are still lagging but should continue to evolve. 

At our regional level, we saw the most gains in Energy as well as Technology, which rebounded from a pullback in Q1. The Financial sectors continued strong, as did cyclical stocks (think airlines, restaurants, auto companies) and consumer discretionary (think Lululemon, Etsy, Home Depot) stocks. 

Not that we’re nitpicky, but some of the lagging sectors in Q2 were utilities, transportation, and materials stocks (such as International Paper, Dupont, and mining companies). It should be noted that all are trading higher for the year, despite lagging.

Interest rates remained relatively low with the 10-year bond yielding 1.44%, although this is a significant jump higher from where the year started. Granted the .92% from year-end 2020 was insanely low, so rates really had <almost> nowhere else to go but higher! 

At the end of the day, most investors are looking at their statements at the mid-year point with a big smile. And they should! After all, the returns we’ve seen so far would be considered a nice outcome after one year, not to mention at just the mid-way point.

Other Thoughts

COVID-19 was not a hoax, but it WAS the world’s first pandemic in this world of social media. I found it amazingly frustrating to see fear being spread in ways never seen before. As much as I read and follow the news, it was challenging to watch. There was many a day where I had to disconnect from all technology because I found it inundating.

I think when the history books are written, the COVID lockdowns may be one of the most damaging public policy mistakes in history. The shutdowns destroyed supply chains, put millions out of work, canceled in-person learning for our youth, and created many mental health issues. Oh, and did I mention the government spending spree of over $5 trillion? Many of these problems will still be assessed in the years to come, for sure.

Yet as we deal with the long-term consequences of government spending and money printing, consumer confidence is returning. The economy has rebounded in a big way. The major market indexes are hitting new highs. I sometimes wonder if recent market highs would be this high if COVID never happened?

Present Day

One could make an argument that a lot is going on right now!  The COVID recovery. Interest rates near zero. Meme stocks in the news. Work from home aka “New normal”. Fed balance sheet at all-time highs – over $8 trillion. M1 Money Supply @$19 trillion (pre-pandemic is was @$4 trillion). Over 9 million job openings but millions of people sitting at home NOT TAKING THOSE JOBS! People sitting on record levels of cash. 

With everything that has been going on, the market has been pretty…well…boring. Volatility is down to normal levels, almost like the market is falling asleep! Yet it continues to grind higher. Well, I am starting to feel like the markets, and investors, are getting complacent. And many might be stretching for risk in the markets.

As I see things, we have a nice little concoction of rising markets, risk-seeking and complacent investors, and volatility that is presently low/close to its long-term average (some are quick to point out that the Central banks’ accommodation has made volatility artificially low). Think it will take much for investors to get spooked? I think not.

Mix in another reason why we might see a spike in volatility: the increase in quant investing. That’s right, computers are doing more trading than ever before. Over the past 15-20 years, these algorithmic trading platforms have gone from @15% of the U.S. trading volume to @75% today. They are responsible for investing assets, providing liquidity, and potentially (and automatically) pressing the SELL BUTTON when things take a turn for the worse.

In other words, when things are good and volatility is low (i.e. NOW) all seems great in the world. But a slight uptick in volatility can cause many of these trading strategies to start to sell automatically. This would potentially, in turn, accelerate a downside move. Investors might be sitting fat and happy right now, but fear strikes quick and never feels good. And if you want to reduce risk during one of these downturns…well, good luck.

I am not trying to scare you. I am just trying to prepare you.

Looking Ahead

In general, I feel good about the market. Most of what I am reading and seeing still points to a positive outlook at least through 2021. That said, setting some downside protection seems to make as much sense now as it ever has. I use protection strategies in nearly every one of my client’s accounts for the purpose of limiting exposure to the downside. Market pullbacks of 10 or 20% are normal and healthy. We just never know when they will come, where they come from, or how severe they will be.

I am an optimist. In that same breath, I am a realist. And I want to keep expectations real as well. Markets get bumpy, and there could be more bumps ahead in 2021. Market fundamentals remain strong, and our economy continues to plow forward by the almighty US consumer. But higher markets are rarely smooth and steady, the waters often get choppy.

In conclusion, there is both a lot to be grateful for and a lot to be concerned about. Yet despite any potential rise in volatility, our long-term investment approach remains steadfast. We invest for the long-term and incorporate a game plan which uses a combination of safe and growth assets. And we’ll remain nimble as possible to try and identify market changes or future opportunities.

Brandon

Disclaimer: This information contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the advisor. The information should not be construed as legal, tax, nor investment advice. Never make investment or financial decisions based on information provided here, without first consulting with your professional investment advisor. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Dow Jones. Data is taken from sources generally believed to be reliable, but no guarantee is given to its accuracy.