2021 Q2 Market Commentary: Riding The Wave

Summer is here and as we look back over the past year in the investment markets it might feel as though we’ve been on the ocean riding a neverending wave. You’d be hard-pressed to find an area of the markets that didn’t post positive returns yet again for the second quarter of 2021. US Large-cap stocks led the way with an 8.5% return for the S&P 500. US Mid-cap stocks posted a slightly lower return of 7.5% and small caps were further behind with a return of just over 4%. Over the past 12 months, small caps have posted an incredible 60% return, while mid-caps are up about 50% and large caps are up slightly over 40%. 

International stocks were not as strong as US stocks in the 2nd quarter, with many countries around the world still struggling in their fight against COVID. Despite this, both the developed market and emerging market MSCI indices were up around 5% in the quarter. Commodities and real estate led all asset classes, with their respective indices posting 13% and 12% returns. Gold prices bounced back from a rough start to the year to post a positive 3% return on the quarter, though they are still down 7% from the start of the year.

Interest rates retreated lower on the quarter, with the 10-year Treasury yield dropping from 1.75% to just below 1.5%. This decrease in rates helped bonds post positive returns in spite of continued low yields, with the Barclays Aggregate index up almost 2% on the quarter. Intermediate Treasury bond funds were generally up about 1% on the quarter while corporate bond funds were up closer to 3%. Inflation-protected bonds had the strongest advance with a return of over 3% on the quarter.

The US economy continues to show signs of strength as more of the country gets vaccinated and COVID restrictions are loosened, but we aren’t out of the woods yet. The highly contagious Delta variant has become dominant around the world and is driving infection rates higher in many places. Some areas of the US still have very low vaccination rates and this could lead to renewed infection surges.  

There are also well-founded fears among many of a spike in inflation due to the massive increases in government spending over the past year. The housing market remains on fire as people relocate after spending a year in lockdown. Supply shortages have shown up everywhere from lumber to semiconductors, leading to spikes in prices. Companies are finding it difficult to hire and many restaurants are raising wages to attract workers. It remains to be seen whether this will lead to a longer-term increase in inflation or if it will be transitory, as the Federal Reserve has indicated is likely.

We saw first-hand some of the issues the pent-up demand is causing as we just returned from our first big vacation since being vaccinated. We went to Hawaii and experienced packed airports, busy rental car counters, and restaurants with 2-3 hour waits. The mayor of Maui has even gone so far as to ask airlines for fewer tourists!

While these are all challenges that could create bumps in the road for the economy, they pale in comparison to the challenges the economy was facing this time last year. The market seems to be acknowledging this, as the S&P 500 has nearly doubled from the March 23, 2020 low. In spite of the rocky road through COVID, the market has been riding a steady wave up since that March 23 low.

This brings me back to our trip to Hawaii and the surf lesson my 8-year-old son Logan took while we were there. The lessons his instructor taught him about riding waves can be applied to your financial life as well:

Find the right balance - The first thing the instructor did was to put the surfboard on his head to find the center, then he took his hands off the board. The board stayed perfectly still on his head without any support. He then put the board in the sand and marked the spot where it was touching his head to show Logan the center of the board. This is where you want to stand on the board to keep your balance when riding a wave. It might not be as easy to find the perfect balance in your portfolio, but having the right allocation between stocks and bonds serves the same purpose. 

Have a plan - The next thing he did was draw a map in the sand of the place where he would be taking him to surf. This was an incredibly crowded location for surf schools because there was an easy surf break that produced long, small waves that were perfect for beginners. Because of the crowds, there was an unofficial system for surfers to follow where they would take one path out to the waves, wait their turn, then catch their wave, then move back off to the side to go back out. Since it’s the ocean, there was no defined path to follow, and since not everyone follows the system, they constantly had to adjust to other surfers. But he had laid out clear goalposts and a general plan for finding the right wave and staying out of the way of others. This is exactly what we do when developing a financial plan for clients. We can’t tell you exactly what will happen in the future, but we can create goal posts and a general path to reaching your goals. 

Visualize the possibilities - Before getting in the water, he had Logan practice laying on the board and jumping to his feet multiple times in the sand. He wanted him to visualize the waves and pretend he was on the water so he’d be ready when they were out on the water. We often tell clients to try to visualize how they would feel if their portfolio fell by a certain dollar amount. This helps us determine an appropriate asset allocation for your portfolio and helps you get through turbulent markets.

Don’t worry about everyone else - As I said before, there were a LOT of people in the water on surfboards in this small area. It can be easy to get distracted watching others catching waves or wiping out. The instructor wanted to make sure Logan focused on what he was doing, not everyone else. Some wild things are happening in the markets in recent months as people speculate on so-called “meme stocks” and “altcoins” and drive them to eye-popping valuations.  You might be feeling some FOMO watching others make huge sums of money, but if we pay too much attention to them we might miss a wave coming for us. 

Keep your eye on the horizon - It’s difficult for an 8-year-old to see over the waves to what’s coming next so the instructor had Logan always pushing himself off the board to look out to the horizon. This is similar to our mantra of looking at your portfolio’s long-term returns, not the short-term. It’s easy to see the wave approaching you right now, but it’s more important to keep your eye on what might be coming later.

Know when to pull back - The instructor warned Logan that earlier in the day someone had taken a wave onto the shore and injured someone who was in the water near the beach. The waves they were riding were well out in the ocean so they were supposed to get off the wave before it reached the shore. Just as it can be tough to know when to get off the wave, it’s also difficult to know when to pull back on your stock allocation when the market is doing so well. Instead of letting emotion control this decision, it’s best to decide ahead of time when to rebalance and stick to that over time.

If you feel like you’ve been riding a wave over the past 18 months you aren’t alone. It’s been an incredible time to be an investor, but be mindful of the lessons I’ve outlined above because waves don’t last forever. It might be time to rebalance, reconsider your target allocation or update your financial plan. As always, we are here to help you along the way., but if you want any surfing tips, you’ll have to ask Logan!

-Chris Benson, CPA, PFS

The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. Please see Additional Disclosures for more information.