We are halfway through 2021. It is so strange to think how fast the past 6 months have went by when last year during this time, we were locked down and the world seemed to be spinning slower than ever.

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If this is your first time tuning in, I’m Eric Powell. There is a lot to discuss about the markets including what we have seen over the past 6 months and where it could be heading, so let’s jump right in.

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The first thing I want to share is a bit of misleading information that some are reporting. Yes, the markets are up for the year and up a drastic amount over the past 12 months, with the Nasdaq leading the last 12 months return at 45.23%. Yes, you heard that correctly, 45.23%

 

You may already know why, but if not, let me address this issue. The markets fell drastically last year when the US announced a lockdown and Covid began to be the focus. As of July 1st of 2020, the market was on the rebound, but still had a way to go. I share that tid bit of information to say this. Please be sure to look at averages over the years and do not fall into a trap of someone trying to show you a small window of a rebounding market that has performed well.  As a fiduciary advisor, I want to be everyone’s friend, but my ultimate duty is to bring you the truth and help you decipher through smoke and mirrors that are often put into place.

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Now let me hop off the soapbox to provide you more information. The economy is showing its strength as businesses have continued to open and virus concerns have lessened. The first 6 months have been quite positive for the US stock market. On the flip side, the bond market has not fared as well with rising inflation and the known fact that the federal reserve will eventually raise the fed fund rate. As of the mid-June meeting where Fed Chairman Jerome Powell spoke, the talk of raising rates is expected to be delayed for the remainder of the year. As we all know, this could change, but Powell said he would give an advanced notice. He also shared the government purchasing of bonds would  start to be tapered off, though again he said not right now and that he will provide advanced notice.

Inflation will be one of the key factors on when the fed will take action. Generally, the goal is to keep inflation at 2%, though the expected rate at the end of 2021 will be closer to 3.4%.

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As inflation continues to increase and interest rates begin to rise, long-term US treasury bonds become less attractive. Now, there is one caveat. What happens if an unexpected event happens in the second quarter of 2021 that hurts the US economy? Well, this is what could be an issue and Fed Chairman Powell mentioned this at his meeting in mid-June.

You see, the Fed has a set of tools they use to try to maintain a steady, healthy and growing economy. Unfortunately, things do happen and economies tend to find themselves in down periods. During these downturns, the Fed has set a precedence of buying bonds, bailing out companies and lowering rates. At this time rates are already low and if the Fed waits too long to raise rates and the economy takes a turn for the worst, well, let’s just say it will be like a house framer trying to work without a hammer. The Fed will need to get rates up to make sure they have their tools for another downturn.

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As we head into the second half of the year, the economy is expected to grow, but not at the rebounding rate we have seen. We do expect long-term treasury rates to begin creeping up, though an unexpected economic decline could flip those expectations on their head.

At the moment, we have all gotten use to rapid growth in the stock market, though there are sure to be bumps in the road. This isn’t a deterrent for you to avoid the market, but a reminder to focus on long-term growth.

For the month of June, the S&P 500 finished +2.33%, Dow +.02%, Nasdaq +5.55%, MSCI EAFE -1.13%, MSCI Emerging Markets +.17% and Barclays US Aggregate Bond Index +.70%

Thank you taking the time to watch. If you have any questions, please reach out.

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