The U.S. investment markets continued to defy gravity in the second quarter of the year, closing out the month of June—and the first half of 2021—at new record highs. This is the fifth consecutive quarter where the U.S. markets posted gains.

Everywhere you looked in a diversified portfolio, there were gains in the second quarter. The Wilshire 5000 Total Market Index and the Russell 3000 Index—the broadest measure of U.S. stocks—gained 15.36% and 15.11% since the beginning of January.

In the first six months of 2021, large cap stocks have gained over 14.5% in value on the Wilshire U.S. Large Cap Index, the Russell 1000 Index, and the S&P 500 Index. Meanwhile, the Russell Midcap Index gained 8.14% this quarter and is up 16.25% for the year, posting a remarkable 62.03% gain since this time last year.

Investors in smaller companies, as measured by the Wilshire U.S. Small-Cap Index, experienced a 5.09% gain in the second quarter, which brings the total return up to 16.66% this year. Whereas the comparable Russell 2000 Small-Cap Index is up 17.54% in the first six months.

International investors saw their stocks rise over the second quarter, but not with the same bullish intensity that we are experiencing in the U.S. For developed foreign economies, the broad-based EAFE Index gained 4.37% in the second quarter and a 7.33% return for the first half of the year. Emerging market stocks of less developed countries, as represented by the EAFE EM index, gained 4.42% in dollar terms in the second quarter, and finished the first half of the year with a 6.46% gain.

For the other investment categories, real estate experienced a 12.84% gain during the second quarter and is up 22.78% since January, measured by the Wilshire U.S. REIT Index. Commodities returns gained 14.67% in the second quarter and is now up a remarkable 30.90% for the year on the S&P GSCI Index.  The energy and metals component of the index, which is influenced by the jump in oil prices, is up 37.62% so far in 2021. The technology-heavy Nasdaq Composite Index gained 11.25% in the second quarter, and is sitting on a 12.73% gain so far this year.

In the bond markets, the rates on longer-term securities jumped from historically low rates to simply low rates. The coupon rates on 10-year Treasury bonds are yielding 1.465%, while 3 month, 6-month and 12-month bonds are exhibiting barely positive yields. Five-year municipal bonds are yielding, on average, 0.51% a year, while 30-year munis are yielding 1.57% on average.

Five consecutive quarters of gains! All-time highs becoming a routine part of the news cycle! Have the markets banished volatility altogether?

Of course, the answer is no. This investment climate is not unprecedented (the late 1990s come to mind), but the current investing climate is clearly far from normal.   Stock market investing always comes with a certain amount of risk, even if the risks are sometimes temporarily hidden from view.

Within the last couple of weeks, there were widespread concerns that the economy was about to experience higher inflation; a 5% single month increase in the Consumer Price Index was the highest jump in 13 years. Investors were startled, to the extent that the U.S. Federal Reserve Board felt compelled to put out a statement saying that it expected the gain in consumer prices to be merely ‘transitory.’ Apparently, investors took the Fed economists at their word; a quick drop in 10-year Treasury yields, when converted to the mathematics of bond market expectations, signals an expected inflation rate of 2% or less. Of course, the biggest investor in Treasuries at the moment (to the tune of $120 billion a month) is the Fed itself, so this may be an example of a government agency fulfilling its own prophecy.

But elsewhere, there doesn’t seem to be any obvious cause for alarm. Hiring and consumer spending are rising, and small business owners’ confidence has bounced back above its pandemic lows. Congress hopes to pass a stimulative infrastructure bill, and interest rates remain low. Corporate earnings are projected to come in at record levels by the end of the year.

Of course, that doesn’t mean we couldn’t hit some rough patches in the second half of the year. Investor sentiment can be tricky, and bull markets tend to end unexpectedly. Unknown factors include the new variants of COVID-19 and the amount and duration of continued government spending used as stimulus for the economy. Let’s enjoy the gains we’ve experienced so far in the year while being mindful that volatility is a normal and expected part of participating in the markets as a long-term investor.

If you have questions about your portfolio and how it is matched to your financial plan or if you would like to discuss your plans and goals, please let us know. We are meeting with clients in our offices and are also happy to plan a virtual meeting if that best suits your needs. Just let us know.



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Treasury market rates:

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