Financial markets delivered another stellar quarter as the economy continues to recover from the Covid pandemic. The S&P 500 returned 8.5% for the quarter and we expect companies to continue to report great earnings as the economy continues to reopen. Additionally, despite inflation fears being on everyone’s minds, the 10-year treasury yield fell from 1.74% to 1.45% resulting in a 1.77% return in the Bloomberg Aggregate Bond Index for the quarter. In a reversal from the 1st quarter, both stocks and bonds performed beyond expectations.
We believe there remains a nice tailwind for stocks given the low interest rate environment and strong consumer balance sheets. Bonds on the other hand likely have a tough path forward as they have enjoyed a 40-year bull market as interest rates have fallen to historically low levels. Going forward, bonds will be challenged as inflation pressures kick in and interest rates normalize to higher levels. While the outlook for bonds is not rosy, they remain an important part of a diversified portfolio to reduce risk and produce income. At Fortress Wealth, we have access to a vast inventory of alternative bond asset classes where we are able to find significant yield improvement over traditional bonds. Our Bond/Fixed allocation has outperformed the benchmark by roughly 2% year to date.
Inside client portfolios we have taken steps to reduce interest rate exposure by further diversifying our bond allocation to less rate-sensitive sectors. In our equity allocations, we began shifting from growth stocks to value and small-cap stocks which should benefit from the economic recovery. We have also slightly increased our exposure to international stocks which are trading an attractive valuation compared to US stocks.
One of the largest debates on Wall Street has been focused on inflation expectations. In response to the pandemic, the government has implemented unprecedented stimulus policy to revive the economy. This has been successful, but many investors are concerned the stimulus measures will result in longer-term inflation. Only time will tell but we believe consumers are likely to see pockets of inflation in various sectors of the economy such as housing and energy prices. However, there should be other areas where advances in technology will help drive prices down. Long-term inflation pressures should subside as economic growth returns to trend level growth (2-3% GDP) from current (6-8% GDP) levels as the stimulus “sugar high” subsides.
We remain cautiously optimistic about future growth over the next 4-5 quarters but are keeping our eye on not only earnings but inflation and tax policy as we head into the fall.
Market Update | 2nd Quarter 2021
