2021 | 2nd Quarter

During the second quarter, the continued belief by investors that global economies will continue to recover from the Covid-19 pandemic drove stock prices higher around the world. Increased vaccination rates, ongoing re-opening of the economy, continued massive fiscal and monetary stimulus, and pent-up demand from consumers led to rapid nationwide economic growth.  In the U.S., large company stocks outperformed small and mid-cap stocks contrary to the previous two quarters. The S&P 500 returned 8.5% while smaller stock indexes were up 3%-4%.  While this recovery from the pandemic downturn is welcomed, it has caused bottlenecks in supply chains across many industries and increased fears that inflationary pressures are building. 

The second quarter witnessed a clear divergence in performance between growth and value. Since October 2020, value-oriented ETF’s outperformed growth-oriented ETF’s. The tide shifted through the second quarter with growth significantly outperforming in May and June. The market also saw a dramatic turnaround in returns by market capitalization. The sizzling small cap ETF’s, which are currently hoovering at record highs, cooled off during the quarter. Large Cap Growth ETFs led the way with Mid Cap Growth close behind. Small Cap Value ETF’s which crushed the market in the first quarter, absolutely reversed course and pulled up the rear in the second quarter. Fixed income ETFs seemed to be undeterred by building inflation pressures and rate increase expectations. Interest rates fell with High Yield ETF’s benefiting the most.

The biggest question facing the markets, besides the eventual return to a “normal” post pandemic world, is whether the increase in inflation we are seeing is just transitory due to the rapid ramp-up in economic activity or if inflation will continue at a higher rate than we have previously experienced.  As we mentioned in our last commentary, there has been a lot of Covid related stimulus spending.  Since last spring, nearly $6 trillion in various fiscal and monetary stimulus packages have been passed, a roughly $1 trillion infrastructure bill is on the table and a possible $3.5 trillion bill is under negotiation.  Whatever one thinks about the merits of these various packages, the fact remains that these packages not only need to be paid for (eventually) but run the risk of creating inflationary pressures as this money flows into the economy.  The Fed has already signaled a possible interest rate hike earlier than previously expected.  In addition, we will continue to watch for what will happen to both corporate and individual tax rates as well as capital gain taxes.

Our outlook moving forward suggests higher market volatility as investors react to the inflation changes and the political process takes its course regarding taxes and spending.  That being said, we continue to have a higher exposure to equities given their relative attractiveness to bonds.  Long-term returns for high quality stocks still outweigh those for longer maturity bonds. Shorter maturity bonds and high-quality municipals make up the bulk of our fixed income holdings.

As always, please call with any questions.

Jonathan F. Kolle, CFA               Joseph K. Champness            Shawn R. Keane, CFP®   

President                                      Director                                    Vice-President              

                  Rusty Giles                                               James V. Kelly, CFA

                    Director of Marketing                                  Director