2021 3rd Quarter Outlook
For the past few years, we’ve been producing companion “vlog” videos to accompany most of these written commentaries. Our vlogs provide visual charts and summaries while our Chief Investment Officer offers additional thoughts. Some of you might find the vlog a preferred way of receiving this content – the accompanying vlog to this commentary can be found here.
Review of 2nd Quarter
U.S. stocks mirrored the recovery in the economy, rising by 9% during the second quarter. While the volatility we saw in the first quarter has subsided a bit, it wouldn’t be surprising if high volatility resurfaced in the next few months. Overseas markets also performed well, with both developed market and emerging market stocks increasing in value by 5%. Bond markets partially recovered from the first quarter decline, rising by 2%.*
Current and Future Environment
Broad economic statistics are consistent with the stock market growth we’ve had during the recovery. First quarter real GDP rose at an annual rate of 6%, and according to the Survey of Professional Forecasters, that growth should be 8% during the second quarter. Unemployment for June is at 5.9%, compared to 6.0% in March.**
Since the beginning of the pandemic, we’ve been uniquely focused on recent and projected corporate earnings to help gauge the impact of the economy on the stock market. After a 50% decline in earnings during the first quarter of 2020, corporate earnings have been rising swiftly, and earnings are now above pre-pandemic levels. Over the next 18 months, earnings are projected to rise at an annual rate of 17%.*** Analysts are expecting the rapid growth in earnings we saw before the pandemic to continue after the recovery, which, if accurate, bodes well for the stock market over the next few years.
Bond yields declined slightly over the past quarter, which is why bond prices increased. The long-term outlook for bond performance is modest because of these low yields. Broad diversification of a bond portfolio into various sectors is the best way to provide a reasonable yield with moderate risk.
The concerns about inflation continue. The 12-month change in CPI as of June was over 5% -- the highest level of inflation since 2008. That level of inflation for a growing economy is not unusual – there have been short-term spikes of inflation of at least 5% in every decade since the 1930s except for the last decade.**** The question is whether this run up of inflation is just a short-term spike following unusual activity, as was the case in the late 40s, early 50s, early 90s, and mid-00s, or is it the beginning of a long-term inflationary rise, as was the case in the late 60s and continuing through the mid-80s. That later period included a couple years of double-digit inflation, which led to high interest rates and resulting lower economic growth. While the potential of increasing inflation has been on our radar screen since the start of the year, we don’t believe there’s enough evidence to point to double digit inflation, and there’s one large piece of evidence that inflation will be much lower: If the consensus market forecast was for high long-term inflation, ten-year U.S. Treasury bonds would surely have a higher yield than their current level of 1.4%.
Other Risks Going Forward
There are risks other than inflation to be worried about. Variants of the virus, and the recent rise in infections in states with low vaccination rates, is one cause for concern. The reported inability of companies to hire workers is another – that could hamper the predicted growth in earnings. And as always, the biggest worries are the ones we can’t specify, because the events that have the greatest impact on the stock market are the ones we can’t predict.
* Source of returns is Morningstar, Inc. Past performance is not indicative of future results.
** Sources of economic data are the Bureau of Economic Analysis and the Bureau of Labor Statistics
*** Source: S&P Dow Jones Indices
****Source: Federal Reserve Bank of St. Louis
This update is provided by Savant Investment Group, LLC (“SIG” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in this report is derived from sources that SIG believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.
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