Capital Market Review: 2nd Quarter 2021

Despite the emergence of the new Delta variant, the U.S. continues to progress toward herd immunity. Experts believe that when 70% of the population has been vaccinated or previously infected, the likelihood of another severe COVID-19 surge becomes less likely. Some are estimating that we could be close to the 70% herd immunity level today. Others believe a level closer to 90% will be needed to reach the goal. While there is still the possibility for setbacks, optimism continues to grow, and our economy continues to reopen.

Inflation

Source: Morningstar Q3 U.S. Stock Market Outlook, Page 29.

The economy continues to rapidly recover from the deep (but brief) COVID-19 recession. The recovery is happening so quickly the risk now shifts to concerns of overheating and inflation. The Consumer Price Index (CPI), the generally accepted measure of inflation, rose sharply in the second quarter. A portion of the price increases is due to the disruption that we are still feeling from Covid-19. For example, the price of lumber nearly tripled from January through May, dramatically increasing building costs. But in June, the price crashed to levels near where it began the year. July was the worst month for lumber returns since 1978.

Both the new and used vehicle markets are experiencing sharply rising prices. The chart above shows that vehicles are the major contributor to the overall CPI increase that we are currently experiencing. Manufacturers made fewer vehicles in 2020, and consumers postponed their purchase plans due to the uncertainty caused by COVID-19. Now, consumers are buying, and there are fewer vehicles available. With these transient factors having a significant impact on the overall CPI level, it is too soon to know if we are experiencing a broader trend of rising prices.

Jobs Recovery

Source: Calculated Risk Blog

With the economy reopening, jobs continue to come back online rapidly. The unemployment rate has fallen from a peak of nearly 15% in April of 2020 to just 5.9% today. While this is tremendous progress, we still have 7.6 million fewer jobs than before the pandemic. At the same time, job openings are at record highs, with employers struggling to fill open positions. Restaurants such as KFC are offering $1,000 signing bonuses to entice candidates to join. Employers are citing enhanced unemployment benefits, concerns about COVID-19, and finding childcare as the leading contributors to the ongoing labor shortage.

Benchmark Returns as of June 30, 2021

Equity markets continued to rise steadily during the second quarter. The reopening trend continues to propel the businesses hardest hit by COVID-19. Commodities, real estate securities, and the energy sector returned 11.76%, 11.3%, and 13.3%, respectively, for the quarter. The technology sector also had a strong quarter posting an 11.56% return. Long-term interest rates fell during the quarter, giving a boost to the bond market. The BBgBarc U.S. Aggregate Bond index returned 1.83% for the quarter but remains down -1.60% for the year.

Bitcoin

Source: Pantera Capital Blockchain Letters

Bitcoin reached a new all-time high of more than $63,000 in April before plunging below $30,000 in June. In March, Tesla CEO Elon Musk tweeted that the company both purchased Bitcoin to hold on its balance sheet and would also begin accepting the cryptocurrency for payment. But in May, Musk reversed the decision to accept Bitcoin due to concerns surrounding fossil-fuel usage for Bitcoin mining. Bitcoin fell over 10% after that tweet. Late in the quarter, China launched a nationwide crackdown to shut down over 90% of its Bitcoin mining capacity. They have also made it much more difficult for their citizens to purchase or transact in Bitcoin. The timing of this crackdown coincides with China’s central bank launching its own digital currency, the electronic Chinese yuan. The People’s Bank of China has been researching and developing digital currencies since 2014 and launched a pilot program in April in four cities. The U.S. Federal Reserve is also studying and considering adopting a digital U.S. Dollar and plans to release a report this summer.

Author: Jim Rambo, CFA | Research Team | Allegheny Financial Group | July 2021

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The information included herein was obtained from sources which we believe reliable. This report is being provided for informational purposes only. It does not represent any specific investment and is not intended to be an offer of sale of any kind. Past performance is not a guarantee of future results.

Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered Broker/Dealer. Member FINRA/SIPC.