Market Review Q2 2021

Market Review Q2 2021

The last 18 months have been a very unique time for the stock market.  Somehow, the markets have fared well in the end, but that brings along some new concerns.  What changes should investors be making?                 



Video Transcript...

Well, it's time for another market review.  And last year, for the second quarter, I did a hike.  So, this year I'm going to do the same.

My wife and I took a quick trip to McCall Idaho found out I finally passed the third of three exams to get my CFA charter.  So, we just decided to take a
quick trip as a celebration.  So, doing a quick hike up to a lake, gonna do quick market review, and then a couple of just general comments on the markets overall, and some things that we're thinking about.

So, here we go.

Well, about three miles later, we made it.  I'll be looking at my notes here, but just a quick update on the markets for the second quarter of 2021.  If you think of US stock markets, 58% of the overall global stock market, quarterly return was 8.24%.  And if you back up and you look at a 12 month return, 44.16%.  So, huge 12 month return.  International, which is 29% of the global markets, 5.65% for the quarter, and again, 33.6% on a 12 month returned number.  So, great performance there as well.  Emerging markets, 13% of the global economy, quarterly return was just over 5% and a 12 month return is 40.9%. So, really a great quarter.  I mean, these are numbers that you'd expect on an annual basis.  So, a great three months.

And then also if you back up and look at a 12 month return, really strong performance. Real estate, which is slightly different than equity, but tends to act like it, quarterly returned 10.17%, and then a 12 month return 34.83%.

So, when you think of equities in general, we've had a really strong second quarter, as well as a strong 12 months.  We're in the middle of the third quarter now and spend mixed returns across those equity indexes, but really it's been a great year so far.  And at this point, those returns are still hanging on.  So, some good news there on the equity front.

As we move toward bonds or fixed income, if you look at the us bond market, 1.83% on a quarterly basis, 12 months has a negative return of 0.33%.  Global bonds, 0.35% and then a 12 month return of just over zero at 0.05%. So, not a lot to talk about there in terms of the fixed income markets, but again, great returns in the equity markets.

So, I know that we've been hearing a lot of concerns about, going forward, what do we expect?  So, I wanna touch on some of those as we move along, but just wanted to stop here while we had the view, and give you the quick market update.  So, more to come.

So, it seems like the main concern people are having about the stock markets right now is inflation. So, I just want to make three quick points about inflation and then just talk about general thoughts.  But the first one, I would say is inflation isn't new.  This is a monster we know pretty well.  If we go back to 1947 and look at what you could buy with a dollar, basically today, that same dollar can only purchase 8 cents worth of goods. So, effectively you need more than $12 today to purchase what you could've purchased with a dollar in 1947.  So, its the hurdle we want to get over.  You need $12 of growth to maintain your standard of living since 1947.

So, if we take a look at this chart and overlay a couple of other things, the only other thing on this chart that has done that successfully over time is the stock market.  Actually grew to hundreds of dollars over that same timeframe. So really, one of the best hedges we know against inflation is the stock market.  And inflation is nothing new, we have lots of data to look at. So point one, it's nothing new.

The second point I would make about inflation is that we need to keep it in perspective.  So, a lot of this conversation started sometime around May when we had a 5% annual inflation number show up. Now, that 5% is based off of the 12 months prior when the economy was shutting down and prices were compressed and all of that. So, it's important to remember what the starting point was when we got to that 5% number.  So, keep it in perspective.  If we look at 24 months, the average annual inflation number over a 24 month period is about two and a half, not five.  So, a lot of it has to do with the starting point, like when I said the 12 month return number for the us stock market was over 44%. It's important to remember that that's right after a terrible March of last year when markets fell quite a bit.  So, keep it in perspective is point number two.

Well, we're five miles in and turning around, just heading back to the car, done with the hike, but just wanted to stop and make the third point about inflation. So, the third point is inflation is not predictive. When we see headlines about inflation, it's almost like they're coupled with this assumption, that inflation means negative stock market returns. But if we really look at the data, here's what we see.

So, if you plot the prior 12 months inflation number against the next 12 months return in the stock market, this is what you find.  And if there were a true relationship, you'd see something like a line here. And it's really just a scattering of data points.  So, and I would also say, when you look at the higher numbers of inflation like 6% and better, you're actually finding more periods of positive stock market return than you are negative stock market return. So, you just have to be careful when assumptions are being made by headlines. 

But we invest on what we believe to be historically proven relationships.  And when you look at this relationship, it's hard to really find anything there.  So, as always the same principles apply. Building the right portfolio from the start, not letting the headlines dictate the way that you're investing and make changes in your portfolio. And more importantly than what change should we be making is the question of were
you in the right place to start with?  Because if you were, it's hard to really look at this data and say there's a change that needs to be made.

So, long story short, markets have been great year to date.  There are certainly some headwinds.  So, it doesn't mean that we can't have negative returns in the stock markets, but as it stands right now, inflation specifically, there's no obvious change that needs to be made to portfolios. 

So, as always, if you have any questions, feel free to reach out. We're a five miles back to the car. So, hopefully we'll make it without issue.  But thanks for watching, I have some maybe fun plans for the third quarter market review too, but I appreciate you watching.