Dear Friends,
As we enter the second half of 2021, we are in the midst of a global economic recovery from the pandemic-induced recession, and the U.S. stock market is at or near its record high. A host of factors have contributed to the recovery, starting with unprecedented fiscal and monetary policy stimulus and most importantly the rapid development and wide scale deployment of vaccines. However, in the midst of all this progress, new questions and problems have emerged. Supply chain bottlenecks have created shortages and soaring prices in some sectors, generating fears of inflation and higher interest rates which could choke back the recovery. Supply/demand imbalances have created a red-hot housing market and it remains unclear as to how this will play out for investors and homeowners. While millions of jobs have come back, there appears to be a disconnect between the jobs available and workers’ willingness or capacity to fill them.
Despite the issues raised above, the tailwinds for the economy and financial markets appear to outweigh the headwinds, at least for now. Both consumers and businesses have money, and they are spending it. Interest rates and monetary policy remain accommodative, and Washington is intent on spending trillions more on infrastructure and social programs. We can all debate the long-term implications of these policies, but there is little doubt that they stimulate the economy in the short term.
The U.S stock market is up about 15% year-to-date and foreign stock markets are up 9-10%. Due to moderately higher interest rates since year end, bond market returns are flat to down year-to-date. We have maintained our clients’ strategic asset allocations throughout the pandemic, and it has paid off during the last fifteen months. Having said that, we are actively managing our portfolios to take advantage of shifts in the market and to reduce the risks of inflation and higher interest rates. For example, we have modestly increased our allocations to value stocks vs. growth stocks and have slightly reduced our fixed income allocations in favor of low volatility, liquid alternatives. With markets once again at all-time highs, we would not be surprised at a selloff or correction sometime in the next year and, as usual, we will be prepared to take advantage of that if and when it happens.
Let us know if you have any questions or if there is anything we can do for you. We appreciate your support and encouragement.
Matt and Andrew