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Q2 Capital Market Highlights

Over the prior year, equity markets saw sizeable returns across major market segments, in both US and International regions, as well as Large and Small Cap Indices. This occurred as both economic and pandemic data continues to trend positively. Consumers, particularly in the U.S., are supported by unprecedented levels of fiscal stimulus. They continue to be a significant driver of growth, with household savings historically high in tandem with moderate consumer debt. These factors have quickly stabilized consumer confidence.

The first half of 2021 brought corporate earnings and economic data in line with or ahead of expectations. First-quarter S&P earnings came in well ahead of expectations, and actual US GDP growth was 6.4% in Q1. The Atlanta Fed’s GDPNow Forecast is currently estimating second-quarter growth to be above 8% growth on an annualized basis.

Also occurring in the first six months of 2021, interest rates rose as anticipated; however, the entirety of the increase occurred in the first quarter, with rates falling in the second quarter. Most market participants expect the downward trend in Q2 to reverse, with rates increasing in the latter half of the year. The main disappointments come from inflation indicators and the labor market recovery, both continuing to provide headaches for central bankers and investors for the remainder of the year.

The Road Ahead

Looking forward, we expect a continuation of equity market growth with additional volatility.

Current calculations remain high, and investors have reasonable expectations going forward.

Additional economic data will clarify whether some current economic concerns related to labor and inflation are transitory or more secular. While the US labor market averaged over half a million new jobs per month in the first half, that was well below market expectations and the pace considered necessary to maintain the economic recovery and resolve current supply chain issues. Towards the end of Q3, we will begin getting clearer signals of how long it will take the labor market to normalize. By then, nearly all of the transitory factors helping drive the weaker than expected labor market recovery should begin to resolve themselves with the end of expanded unemployment benefits and schools reopening for in-person learning.

Central bankers have continued their accommodative monetary policy approach on the belief that current inflation indicators are transitory and will normalize as global supply chains come back online.  However, some market participants see data pointing to a more sustained inflationary environment. Proponents of the transitory narrative point to the recent fall in lumber prices as presaging an eventual normalization of commodity prices, while proponents of the sustained inflation narrative point to CPI continuing to meet or exceed expectations along with wage growth—a signal not typically associated with transitory pressures.

Despite these significant risk factors, many of which we expect to be major drivers of ongoing volatility, we believe that the tailwinds to economic and corporate earnings growth are substantial enough to sustain further equity market growth through the end of the year.

Portfolio Update

To increase global stock exposure, we added GMO Resources Fund to models. This manager has a flexible mandate to invest in companies with the potential to benefit from infrastructure spending and rising commodity prices. We are always looking for ways to lower investment-related costs, so we exchanged SPDR Gold ETF (ticker GLD) with an expense ratio of .40% and replaced it with SPDR Gold Minishares Trust (ticker GLDM) with an expense ratio of .18%.  ARK Innovation and Brown International Small Company were key contributors to models in Q2, while gold and ATAC Rotation fund were out of favor in a predominantly “risk-on” environment.

Structured notes performed in line with expectations. As the global economy continues to reopen, we see favorable conditions for international and emerging market stocks. Strong demographics and demand are driving residential real estate; the active approach of Baron Real Estate fund should continue to contribute on a risk-adjusted basis.

We are grateful for your continued trust. We wish you and your family a safe and memorable summer!