Summary of 2Q/2021: Another Strong Quarter Despite Inflation
Stocks ended the quarter with robust gains into record high territory for the S&P 500 Index, marking the fifth consecutive quarter of gains since the depths of 1Q/2020. Data on hiring, consumer spending, and small business owners’ confidence have bounced back nicely from their pandemic lows. The fly in the ointment of the second quarter was inflation. We have already posted several blogs on that topic, so we will not repeat those numbers here. The Federal Reserve has made clear that it will not remove the punchbowl of its Zero Interest Rate Policy until at least the second half of 2023, and the bond market expects annual inflation of about 2.3% for at least the next five years.
One of the contributors to inflation on the supply side is the global chip shortage. “Ford to Idle Plants As Chip Shortage Will Slow Output,” reads the headline in the Business & Finance section of the 7/1 Wall Street Journal. We recently spoke with an industry insider who informed us that for various and complicated reasons, we should not expect the shortage to alleviate anytime soon. The tight labor market throughout the economy, while great for workers, also does not bode well for consumer prices.
The table below summarizes the estimated returns for various asset classes based on the performance of Vanguard index funds. Please note that they do not necessarily represent the returns of the funds or portfolios utilized by Clarity Capital Advisors.
Asset Class Ticker Used 2Q/21 Return YTD 6/30/21 Return
US Total Market VTSAX 8.3% 15.2%
US Large Growth VIGAX 11.7% 13.4%
US Large Value VVIAX 5.3% 16.8%
US Small Growth VSGAX 5.8% 8.5%
US Small Value VSIAX 5.4% 23.1%
US Real Estate VGSLX 11.7% 21.4%
International VTMGX 5.7% 9.9%
Emerging Markets VEMAX 5.2% 8.9%
US Bond Market VBTLX 2.0% -1.7%
US TIPS VAIPX 3.1% 1.7%
Source: www.vanguard.com
As seen above, all the classes of stocks experienced strong gains in the second quarter with large growth and real estate stealing the show. On a year-to-date basis, small value and real estate were the winners. Recall that real estate, unlike the other equity categories, was down in 2020. Also, value stocks vastly underperformed growth stocks in 2020. For the next decade, we expect value stocks to outperform growth stocks based on the large difference in current valuations. International and emerging markets once again underperformed the overall US market. For the next decade, we expect to see foreign stocks outperform based on the Vanguard Capital Markets Model. Bonds bounced back from their losses in the first quarter, with inflation-protected bonds outperforming nominal (non-inflation-protected) bonds due to the appearance of higher-than-expected inflation. The year-to-date numbers perfectly illustrate why we consider inflation-protected bonds to be a good diversifier for nominal bonds.
Gold, which is often touted as something that outperforms at the appearance of unexpected inflation, was only up about 3% for the quarter. Facing regulatory challenges in China, Bitcoin lost about 41% (Hey, it could not keep doubling forever!). Surprisingly (at least to us), some of the meme stocks are still going strong, but in an indication that regulators are taking a dim view of the gamification of the financial markets, FINRA has hit Robinhood with a record $70 million fine for causing “widespread and significant harm” to customers. At the risk of sounding like a schoolmarm, we will say it—Investing is not a game! As the great economist Paul Samuelson put it, “Investing should be like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” Given the brutal heat wave, maybe consider Atlantic City instead.
As for what you should do in this inflationary environment, our advice, as always, is to grit your teeth and stay the course.