Global stocks posted another stellar quarter on the pandemic reopening, providing the strongest first-half performance in over twenty years (Markets Insider, “US Stocks Close Mostly Higher to Finish One of the Strongest First Halves of the Year since 1998,” 6/30/21). However, the tranquility seen among the major indices masked several waves of rather violent rotation among the sectors, styles and capitalization weightings that comprise them driven by uncertainties surrounding growth versus inflation and the future policy direction of the US Federal Reserve.

For the quarter, US large-cap stocks finished higher by +8.36% (‘SPY’ ETF Proxy*), now up +15.2% for the year. Overseas equities under-performed somewhat, held back by a strengthened US Dollar with most of the world slightly behind in vaccinations and the prospect of higher US interest rates ahead. Developed and emerging nation stocks rose +5.7% (‘VEA’) and +4.8% (‘IEMG’) on the quarter, respectively. Bonds finished flat to lower after a relatively poor start to the year, recovering somewhat as growth expectations moderated late in the quarter and as the Federal Reserve reiterated its patience towards raising rates despite increasingly hot inflation reads until more progress is made on the jobs front. The US Aggregate Bond index rose +1.3% (‘AGG’), while overseas bonds closed slightly in the red for the reasons noted above. More dramatically, global real estate advanced +9.8% (‘RWO’) on lower rates and healthy demand, while commodities rose a whopping +15.9% (‘DBC’).

While it is too early to call the outcome, the on-going tension between expectations of growth versus inflation will likely continue to control much of the day-to-day movement of markets, as well as the relative performance undercurrents among the sub-asset classes. So far this year, we have seen three distinct cycles, first led by technology growth stocks on a continuation of the reopening trade, then a rotation favoring small-caps and value as rates rose, only to see that compress again in favor of growth as rates came back down to annual lows on slower forward growth estimates melded with a nod towards technology stocks’ enhanced pricing power.

Markets also have elevated valuation levels to contend with and the fact that we have yet to see the typical -6.5% minimum annual retrace. Add that to lower summer volume and we might expect greater volatility ahead, although our outlook for the balance of the year remains constructive for the moment. We will remain vigilant towards these points, meanwhile, enjoy your summer and keep cool during this season of extremes!

* Not Individual Investment Advice; Dividend-adjusted proxy ETP data from Commodity Systems, Inc. & Allocations as of June 30, 2021 may not apply to all clients; ECA assumes no duty to update any information in this presentation for subsequent changes of any kind.