In sum, the strong gains of the second quarter and the first half of 2021 reflected continued government support for the economy combined with a material improvement in the pandemic in the U.S., and as we start the second half of 2021, we are happy to say the world looks a lot more like it did pre-pandemic than it did for most of 2020, and that sentiment is supportive of risk assets going forward. Those two surprises caused some mild market volatility late in June, although ultimately investors remained confident that the Federal Reserve will not remove economic support too quickly and the S&P 500 hit another record high during the last few days of the quarter. The June Fed meeting provided a small surprise to markets, as it revealed that Federal Reserve officials began discussions about when to reduce the current quantitative easing program, while Federal Reserve forecasts showed interest rates could start to rise late in 2022, sooner than previously expected.

Stocks resumed the rally in early June as more state economies returned to pre-pandemic normal, measures of economic activity remained strong, and certain inflation statistics (such as falling lumber prices) implied that inflation pressures were starting to ease, possibly validating the Fed’s belief that surging inflation is just temporary. Investors were comforted enough for stocks to rebound in mid-May and close the month with a small gain. Meanwhile, Federal Reserve officials reiterated their long-held position that any increase in inflation would be temporary and due to pandemic-related supply chain disruptions and not the return of 1970’s style inflation problems. But after some volatility early in the month, it became apparent that the lackluster job growth was more a function of a labor supply issue rather than there not being enough jobs available, and investors came to believe that issue will resolve itself as the economy and society continues to return to pre-pandemic “normal.” That, combined with inflation metrics hitting multi-decade highs, elicited some concern the economic recovery might not be as strong as forecasted, and that a return of inflation might make the Federal Reserve begin to reduce accommodation earlier than previously expected. A disappointing jobs number in early May implied the labor market might not be recovering as quickly as expected. The rally paused in May, however, thanks to uncertainty regarding inflation, the labor market and when the Federal Reserve would begin to reduce, or taper, its quantitative easing (QE) program. These positive factors helped stocks rally throughout the month, as the S&P 500 hit a new record above 4,200 during the final days of April. Finally, first-quarter corporate earnings were very strong, as most U.S. That continued “safety net” gave investors confidence in the future economic outlook and the sustainability of the economic recovery. Meanwhile, the Federal Reserve reiterated its support for the economy and promised not to remove any accommodation in the near term. That served as a positive signal to investors that a return to pre-pandemic normal was now likely just a matter of time.

The increased pace of vaccinations combined with a decline in COVID-19 cases helped numerous states more fully reopen their economies or prompted the announcement of plans to do so soon.

At the same time, the number of new COVID-19 infections fell from approximately 77,000 daily new cases at the beginning of April to less than 60,000 daily new cases during the last week of the month. accelerated meaningfully with daily vaccinations hitting a peak of more than three million per day by the middle of the month. As highlighted by a recent Bank of America survey, markets are currently dominated by a consensus based on three core hypotheses: durable high global growth transitory inflation and ever-friendly central banks.īy embracing this positive view of the world, investors have pushed stocks and corporate bonds ever higher, stabilized government bond markets, and sidelined short sellers who bet on falling stock prices.Įarly in the quarter, the pace of vaccinations in the U.S. The S&P 500 had a strong second quarter thanks to numerous positive developments that led to a “Goldilocks” economic environment. Looking back at the second quarter of 2021 Part 3: A look ahead - our outlook for the rest of 2021 Part 2: What actions did we take in McKinley Carter portfolios in Q2? Part 1: Looking back at the second quarter of 2021

A goldilocks economy