• Positive Momentum. The global recovery remains largely on track, as economies continue to rebound from the dislocations caused by the pandemic.  Massive fiscal stimulus, historically low interest rates, strong corporate earnings, and a war-chest of household savings remain in place as strong drivers of positive risk sentiment.  The S&P 500 strung together five consecutive monthly gains from February to June to close out a solid first-half return, one of its best in twenty-three years.

• Covid Update. The latest count reveals that about 67% of adult Americans have received at least one dose of the Covid-19 vaccine.  While this lands slightly below the Administration’s goal of 70% vaccinations by the July 4^th holiday, it is enough for many people to feel comfortable resuming pre-pandemic activities such as dining out, shopping, and travel.  The recent emergence of the virus’ delta variant does lend some concerns, as this mutation appears to be much more contagious than other variants.  Fortunately, health data shows that it is not driving a surge in the rate of hospitalizations in regions that have high vaccination rates.
• Economy Expansion. As the economy continues to reopen, we believe there may be runway for further expansion.  So far, the data point to an economy that is recovering briskly, faster than typically seen in past recessions, although hit by a number of shortages and bottlenecks as supply chains struggle with demand.  Industrial production is growing, and household net worth climbed to new heights, boosted by stimulus checks, and loftier equity prices and real estate values.  There are clear signs that businesses are eager to hire, and the labor market supply is unable to keep up with the surge in demand, partly due to generous unemployment benefits, lingering health concerns, and a lack of childcare availability.

• Inflation. The new economic landscape, though rosy currently, poses a number of critical questions for investors.  A key one is whether the growth will be strong enough to meet optimistic earnings expectations without fueling sustained inflationary pressures – the kind that could compel the Federal Reserve to speed up a turn toward tighter monetary policy.  Already, the post-pandemic economic rebound is driving the biggest surge in inflation in nearly thirteen years.  Consumers are paying higher prices for many of their purchases, from lumber prices to used cars and trucks.  The optimistic case is that the pickup in inflation is mostly a transitory effect that will fade as supply bottlenecks are overcome, and the surge in demand runs its course.  For now, the final outcome on how inflationary pressures will play out remains to be seen.

• Rates Retreat. Bonds are enjoying some relief after the headwinds seen in the first few months of the year, when yields moved sharply higher.  The 10-year U.S. Treasury yield spiked from 0.9% at the start of the year to 1.75% at the end of Q1, and the relative pace of the rise have raised some worries.  Higher rates would ultimately provide competition for investment dollars, and make it more costly for companies and individuals to borrow.  Rates have since stabilized, retreating to 1.33% at time of writing.

Christopher Lai

Senior Portfolio Manager

07/16/2021