There is a decent chance you are reading this quarter’s commentary while on vacation, just back from vacation, or about to leave for vacation. With the country pretty much fully reopened, Americans are taking to the skies and the roadways this summer. TSA checkpoint numbers in July are up 300% vs. 2020 but still down about 20% from 2019. I suspect much of the decrease is still due to a lack of demand for business travel. There is no doubt travel is great for the economy, especially the hospitality sector, which COVID-19 related shutdowns hit especially hard. (Until just now, I almost made it an entire paragraph without using the phrase COVID-19; that alone is a sign of improvement). My family just returned from a great trip to San Diego, CA. Outside of masks on the plane and in ride-sharing services, the trip felt like traveling in a world before COVID-19.
Before I address the markets, just a quick word on COVID-19: the United States is seeing an increase in cases as the Delta variant becomes the dominant strain. This contagious strain of the virus now accounts for over 80% of cases in the U.S, but unlike with past surges, there has not been a significant increase in hospitalizations and deaths as of now. The current thinking is, vaccinated persons are testing positive but showing little or no symptoms. Positive tests, vaccines, hospitalizations, and deaths will continue to be published and discussed (ad nauseam), but something catastrophic with the Delta variant would have to happen to see another shutdown.
As pointed out in past commentaries, market returns over the last 20 years have been dominated by Growth stocks. However, in late 2020 this began to change and that has carried over into 2021. Large Cap Growth stocks returned almost 11% in the second quarter, while Large Cap Value stocks returned 5.39%. Even with the solid second quarter for Growth stocks, Value has had a higher return for 2021 (17.11% vs. 12.61%) and over the last 12 months (42.30% vs. 40.65%). It is healthy for a stock market to have different investment styles (Growth/Value) leading the market higher. Long-term market growth is not sustainable if the gains are too dependent on technology stocks, which make up 40% of the Growth sector. International stock markets continue to lag behind U.S. markets, as evidenced by Foreign Large Blend stocks returning 9.08% for 2021. Much of this can be attributed to a slower rollout of vaccines outside of the U.S. and, therefore, a slower reopening. As the rest of the world becomes further removed from COVID-19, International stocks could look cheap compared to their U.S counterparts.
If anyone reading this has purchased a car, gas, plane ticket, hotel room, or food in the last few months, you have likely noticed that you are paying more than you paid last year. The Consumer Price Index (CPI) increased 5.4% between July 1, 2020, and June 30, 2021. This was the most significant increase in 13 years. The sharp increase is due to supply constraints and a continued rebound in the costs of travel-related services from pandemic-depressed levels as the economic recovery gathered momentum. The CPI surged 0.9% in June alone. Most economists believe the significant increases in inflation are short-term and do not point towards hyperinflation down the road. This belief is based on looking closely at what is causing the current rise in inflation. Of the 0.9% rise in June, over one-third was due to a rise in the costs of used cars and trucks. A global semiconductor shortage has undercut motor vehicle production. Demand is primarily driven by rental companies, desperate to restock after offloading their fleets at the height of the pandemic. Industry data suggest used car and truck prices will soon cool off, helping to cool off the current rise in inflation.
The Federal Reserve (the Fed) aims to have inflation run around 2% on an annual basis. Inflation running well above that target for an extended period can lead to uncertainty in the economy, low growth, and less stability. The most powerful tool the Fed can employ to battle inflation is to raise interest rates. If they are forced to aggressively raise rates to battle inflation, that can cause corporate and consumer borrowing to dramatically slow down and lead to a recession. As of now, the Fed believes they will be able to slowly raise rates off current historic lows but it will be something to watch over the next six to twelve months.
COVID-19 and the latest variant will likely dominate the headlines in the second half of 2021. At Persium Group, we will continue to follow the pandemic and its potential impact on the economy and the markets. We will likely see more market volatility in the second half of the year than we did in the first, but volatility presents an opportunity when you have a sound investment plan.
I started this commentary by highlighting the travel boom taking place across the country right now, and I’d like to end on that same promising note. My family’s travel and that of my colleagues and clients has me thinking of the great Willie Nelson song, “On the Road Again”: “On the road again / Goin’ places that I’ve never been / Seein’ things that I may never see again / And I can’t wait to get on the road again.”
The views and opinions expressed are of Persium Advisors, LLC. This commentary is provided for educational purposes only and should not be construed as investment advice. Persium Advisors is an investment advisor firm located in Atlanta, GA.
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