Anxiety over COVID-19 diminished dramatically during the 2nd quarter due to widespread vaccination efforts that led to dramatically falling infection rates and deaths. This provided a powerful backdrop for the U.S. economy to continue its strong recovery, fueled by exceptionally low interest rates, government fiscal support programs, increasing employment, and healthy consumer spending.
Not unexpectedly, the equity market responded to this very positive environment by surging during the 2nd quarter, with the S&P 500® up over 8%. However, value and small cap sectors of the market, which are considered the prime beneficiaries of the economic reopening, began to again lag in performance relative to the large cap growth sector with its heavy orientation to technology. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.)
However, in a very unexpected twist, interest rates reversed the upward trajectory they had been on due to inflation fears, and actually declined by roughly 0.2% for longer term treasury bonds. This is surprising given the dramatically higher levels of reported inflation statistics and evidence that Federal Reserve (Fed) policy makers may be preparing to move away from extremely low interest rate policy they have followed for some time.
As the second half of 2021 approaches, it is a good time to assess key elements of the economy and to consider whether any changing dynamics warrant changes to investment strategy or tactics.