Markets reflected a legitimate improvement in the macroeconomic outlook during the second quarter as substantial progress against the pandemic helped underwrite the gains in stocks over the past three months. But that strong performance should not be taken as a signal that risks no longer remain, and in fact the next three months will bring important clarity on several unknowns including inflation, future Federal Reserve policy, and the pandemic.
Regarding inflation, some metrics in June implied that the spike in inflation during the second quarter is starting to reverse, but that debate is far from settled. To that point, no one knows what the trillions in pandemic stimulus combined with 0% interest rates and the Fed’s ongoing QE program will do to inflation over the longer term. If this sudden surge in inflation is indeed just temporary, we should see more conclusive evidence of that during the third quarter. We are watching inflationary market expectations and data very closely right now and we are seeing signs of strong inflationary pressures.
The Federal Reserve, meanwhile, has started the process of communicating how it will begin to reduce support for the economy via “tapering,” or reducing, its quantitative easing program. The last time the Fed had to deliver that message, they triggered the “Taper Tantrum” of 2013, which saw stock and bond market volatility rise significantly. It remains to be seen how expected removal of accommodation and an eventual increase in interest rates will impact markets. They are walking a fine line between spooking the equity markets by acting too quickly and not acting quickly enough, which could allow inflation to rear its ugly head. So far, they appear to have walked the line successfully.
Finally, despite significant progress against COVID-19 here in the U.S., the pandemic is not over. Vaccination rates for most countries are well behind that of the United States, and the second quarter saw an explosion of COVID-19 cases in India and an outbreak in China. Meanwhile, England delayed its planned economic reopening over concerns about the spread of the “Delta” COVID-19 variant that was behind the surge in cases in India. In late June, both Australia and South Africa reimplemented local lockdowns due to rising cases of the Delta variant. Point being, there remains a possibility that a new COVID-19 variant appears and renders the vaccines less effective. If that happens, markets will become concerned that progress towards a return to economic “normal” will be reversed, and that will cause volatility.
In sum, while there has been material progress made in the United States against the pandemic, and life as we know it has thankfully returned mostly to normal, now is not a time to become complacent as investors, given numerous economic and pandemic-related risks remaining. As such, while the macroeconomic outlook is still decidedly positive, we should all remain prepared for bouts of market volatility.
Yet while risks remain to the markets and the economy, as they always do, it is important to remember that a well-executed and diversified, long-term-focused financial plan can overcome bouts of even intense volatility, like we have seen over the last 18 months.
At Ivory Hill, I understand the risks facing both the markets and the economy and are committed to helping you effectively navigate this still-challenging investment environment. Successful investing is a marathon, not a sprint, and even temporary bouts of volatility like we experienced during the height of the pandemic are unlikely to alter a diversified approach set up to meet your long-term investment goals.
Therefore, it is critical for you to stay invested, remain patient, and stick to the plan, as we have worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline. If you have not yet signed up for the new Ivory Hill Private Client Portal and gone through the financial planning process, please reach out to me to do so. This is something I offer all my clients as a part of our services at no additional cost.
The economic and medical progress achieved so far in 2021 notwithstanding, I remain vigilant towards risks to portfolios and the economy, and we thank you for your ongoing confidence and trust. Please rest assured that I will remain dedicated to helping you successfully navigate this market environment.
Please do not hesitate to contact me with any questions, comments, or to schedule a portfolio review.
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Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President