WESCAP Group’s Q2 2021 Quarterly Commentary
Portfolio results for the second quarter of 2021 benefited from continued strong gains from global stock markets, many bond markets and commodities. COVID 19 is in rapid retreat in areas with high vaccination rates, including most of the U.S. Vaccines are also relatively effective against all of the new coronavirus variants, so more countries are expected to lift various pandemic-related restrictions, which will bolster global employment, trade and consumer spending. Some labor shortages and production bottlenecks have caused an increase in U.S. inflation. However, the recent decline in the 10-year Treasury note yield suggests minimal longer-term inflation concerns from the bond market, which suggests that the inflation surge will dissipate over the coming 6 months as worker and supply bottlenecks are expected to wane.
The decline in U.S. interest rates particularly helped growth stocks. The S&P 1500 Growth index returned 11.2% over the second quarter. Unlike the prior two quarters, value stocks did not outperform growth stocks, but the S&P 1500 Value index still turned in a respectable 4.9% for the quarter. The S&P 500 return was 8.6% for the quarter. Small (Russell 2000) and micro-cap stocks had a more pedestrian 4.3% and 4.1% quarterly return, respectively, though year-to-date returns were torrid at 17.5% and 29.0%, respectively.
Foreign developed stock markets (EAFE) and emerging markets stocks had 5.2% and 5.1 % gains respectively for the quarter, and frontier markets had a robust 14.1% gain. Anticipated economic recovery and a slightly weaker dollar benefitted most foreign stock and bond markets.
Long-term Treasury bonds (Bloomberg/Barclays 20+ Yrs) partly reversed their first quarter loss of 13.9% with a second quarter gain of 6.8% thanks to the decline in interest rates noted earlier. Most other U.S. bond sectors produced returns under 1% for the quarter.
Real estate benefited from both lower interest rates and improving economic and mobility activities, with the NAREIT (REIT) equity index returning 12.0% over the quarter.
While S&P 500 valuations look a bit stretched at this point, a powerful 2021 expected S&P 500 earnings growth of 35.4% and 2022 earnings growth of 11.2% (Zacks) compared to depressed 2020 earnings would put 2022 expected valuations into a still above-average, but more normal range. Value stocks and small cap value stocks are much more reasonably valued right now and thus offer higher long-term return prospects. European valuations are also more attractive currently. Continued fiscal and monetary stimulus also provide a strong tail wind for financial and real assets. Eventually this will taper off and we will be ready to pivot in a different direction when this happens. As always, please feel free to contact your WESCAP advisor if you would like to discuss any of this further