The post pandemic economic rebound was alive and well in the second quarter, both here in the U.S. and in Europe. This quick rebound in activity is fueling inflation, some of which may be temporary due to pent up demand. The Federal Reserve has viewed much of this inflation increase as transitory, but recently has shown some minor concern, and we might now expect rate hikes sometime in 2023. This may be a little earlier than we were initially expecting. How much of this inflation is likely to stick around longer term is one of the biggest questions facing investors right now. Here in the U.S., the S&P 500 posted the best returns for the quarter (+8.5%), thanks to the rebound in growth stocks, strong first quarter earnings growth and the potential for additional fiscal stimulus through infrastructure spending. Developed international markets were not far behind, up (+5.2%) supported by economic reopening and strong demand for global goods.
In the bond markets, investors were searching for yield in emerging markets debt (+3.9% for the quarter) and for an inflation hedge through Treasury Inflation Protected bonds (+3.2%).
It is widely expected that this rebound will continue through the end of the year, but perhaps we cannot expect to achieve annualized growth rates of 6.4% like first quarter on the regular. And because of that, we are setting our expectations for some higher volatility as we progress through the year. Close attention to portfolio management, including rebalancing opportunities and cash management are a must.
Click HERE to read our full 2Q21 Capital Market Review.