July 2021
Market Update

So far this summer, we have experienced some record heat and another record high in the stock market!  Time will tell which one cools off first but for now we are enjoying the march higher in the market and just trying to survive the heat while we celebrate Independence Day.  We would be amiss if we did not express gratitude for the freedoms that we all enjoy in this country.  Many of us have been given these freedoms without any sacrifice of our own so now is a great time to remember those that went before us and as Abraham Lincoln said, “laid so costly a sacrifice upon the altar of freedom”. 

Personal freedom makes us one of the happier countries, just look at the graphic of the month to see global happiness levels around the world. 

Quarterly Insights - July 2021

The S&P 500 rose to another record high during the second quarter as a substantial decline in U.S. COVID-19 cases combined with a near-total economic reopening across the country led a surge in economic growth that helped stocks rally to new highs over the past three months.  The S&P 500 had a strong start to the second quarter thanks to numerous positive developments. First, the increased pace of vaccinations combined with a decline in COVID-19 cases helped numerous states more fully reopen their economies or prompted the announcement of plans to do so in the near future.  That served as a positive signal to investors that a return to pre-pandemic normal was now likely just a matter of time.

Meanwhile, the Federal Reserve reiterated its support for the economy and promised not to remove any accommodation in the near term. That continued “safety net” gave investors’ confidence in the future economic outlook and the sustainability of the economic recovery. Finally, first-quarter corporate earnings were very strong, as the vast majority of U.S. companies beat earnings estimates. These positive factors helped stocks rally throughout the quarter.  The rally paused several times, thanks to uncertainty regarding inflation, the labor market and when the Federal Reserve would begin to reduce, or taper, its quantitative easing (QE) program. A disappointing jobs number in early May implied the labor market might not be recovering as quickly as expected. That, combined with inflation metrics hitting multi-decade highs, elicited some concern the economic recovery might not be as strong as forecasted, and that a return of inflation might make the Federal Reserve begin to reduce accommodation earlier than previously expected. But after some volatility, it became apparent that the lackluster job growth was more a function of a labor supply issue rather than there not being enough jobs available, and investors came to believe that issue will resolve itself as the economy and society continues to return to pre-pandemic “normal.” Meanwhile, Federal Reserve officials reiterated their long-held position that any increase in inflation would be temporary and due to pandemic-related supply chain disruptions and not the return of 1970’s style inflation problems.  Investors were comforted enough for stocks to rebound, and the S&P 500 hit another record high during the last few days of the quarter. 

In sum, the strong gains of the second quarter and the first half of 2021 reflected continued government support for the economy combined with a material improvement in the pandemic in the U.S., and as we start the second half of 2021, we are happy to say the world looks a lot more like it did pre-pandemic than it did for most of 2020, and that sentiment is supportive of risk assets going forward.

3rd Quarter Market Outlook

Markets reflected a legitimate improvement in the macroeconomic outlook during the second quarter as substantial progress against the pandemic helped underwrite the gains in stocks over the past three months. But that strong performance should not be taken as a signal that risks no longer remain, and in fact the next three months will bring important clarity on several unknowns including inflation, future Federal Reserve policy, and the pandemic. 

Regarding inflation, some metrics in June implied that the spike in inflation during the second quarter is starting to reverse, but that debate is far from settled. To that point, no one knows what the trillions in pandemic stimulus combined with 0% interest rates and the Fed’s ongoing QE program will do to inflation over the longer term. If this sudden surge in inflation is indeed just temporary, we should see more conclusive evidence of that during the third quarter. 

The Federal Reserve, meanwhile, has started the process of communicating how it will begin to reduce support for the economy via “tapering” or reducing, its quantitative easing program. The last time the Fed had to deliver that message, they triggered the “Taper Tantrum” of 2013, which saw stock and bond market volatility rise significantly, and it remains to be seen how expected removal of accommodation and an eventual increase in interest rates will impact markets.

Finally, despite significant progress against COVID-19 here in the U.S., the pandemic is not over. Vaccination rates for most countries are well behind that of the United States, and the second quarter saw an explosion of COVID-19 cases in India and an outbreak in China. Meanwhile, England delayed its planned economic reopening over concerns about the spread of the “Delta” COVID-19 variant that was behind the surge in cases in India. Then, late in the month, both Australia and South Africa reimplemented local lockdowns due to rising cases of the Delta variant. Point being, there remains a possibility that a new COVID-19 variant appears and renders the vaccines less effective. If that happens, markets will become concerned that progress towards a return to economic “normal” will be reversed, and that will cause volatility. 

In summary, while there has been material progress made in the United States against the pandemic, and life as we know it has thankfully returned mostly to normal, now is not a time to become complacent as numerous economic and pandemic-related risks remain. As such, while the macroeconomic outlook is still decidedly positive, we should all remain prepared for bouts of market volatility. 

At Copperwynd, our models continue to have us fully invested.  We have made several shifts this quarter both on the bond and stock side as we are committed to effectively navigating this still-challenging investment environment. Successful investing is a marathon, not a sprint, and even temporary bouts of volatility like we experienced during the height of the pandemic have shown the value of our investment models to help meet your long-term investment goals.  Notwithstanding the economic and medical progress achieved so far in 2021, we remain vigilant towards risks to portfolios and the economy, and we thank you for your ongoing confidence and trust. 

As always, we continue to encourage you to reach out with questions or concerns and we hope you enjoy those much-needed vacations during the summer months.

If you have questions, please contact us.

FINANCIAL PLANNING
COLLEGE AND TAX PLANNING
401(K) ALLOCATION
GRAPHIC OF THE MONTH

To download the July 2021 Newsletter: CLICK HERE