21 Jul Second Quarter Market Update 07.20.21
WealthSouth Second Quarter Market Update
WealthSouth, in light of the renewed inflation concerns, combined with the start of a new economic cycle, we continued adding to cyclical companies and those with exposure to Natural Resources.
A lot can happen in a year. At this point last year, I would have thought it quite unrealistic to believe we would safely gather with family and friends over this July 4th weekend to talk about the S&P 500 having returned over 40% since last July 4th. Now, with almost 57% of the U.S. population having received at least a partial vaccine, it feels like we are finally getting to the light at the end of the tunnel. The stock market was able to reach record highs on the backs of historically strong corporate earnings and solid economic data. U.S. GDP grew at an annualized rate of 6.4% in the first quarter of this year while companies in the S&P 500 grew profits over 40% in the year ending March 31st. The new highs did not happen without hiccups; inflation concerns drove some temporary fear into the market causing a brief 4% drawdown in May.
The theme that unequivocally dominated headlines and drove narratives this quarter was inflation. The Consumer Price Index surpassed expectations in all three months, with the most recent monthly increase showing an annualized 5% rise over the same period last year. More stimulus and pent-up demand caused this to be the largest 12-month increase since the 5.4% reading in August 2008. Leading those increases was the used car market with used car prices jumping over 20% from March to June. At this time last year many rental car companies struggled due to travel restrictions and sold fleet to stay afloat. Anyone who has traveled recently has probably noticed the impact from limited supply and a substantial increase in demand. The Federal Reserve (Fed) maintains this is transitory inflation and believes many of these spikes will cool down over the next several months as demand pressures slow and companies normalize inventories.
At WealthSouth, in light of the renewed inflation concerns, combined with the start of a new economic cycle, we continued adding to cyclical companies and those with exposure to Natural Resources. Our dedicated TIPs (Treasury Inflation Protected Securities) position and overweight to High Yield Bonds also positions client portfolios well if rates continue drifting up. Our overall investment process continues to lead us toward higher quality names with solid balance sheets, reasonable valuations, and sustainable cash flows. We focus on companies with proven management teams that consistently provide shareholder value. With this in mind, as domestic valuations have risen, we have trimmed our larger company domestic exposure and added to more attractive areas in developed and emerging international markets.
Another major topic clients have asked us about this year is the rise (and fall) of cryptocurrencies. We just witnessed one of the largest pullbacks in cryptocurrency in April. At its lowest point, Bitcoin (the world’s largest cryptocurrency by value) had lost 40% of its value from its highs in March. While the crypto market has seen some recovery since the lows, the selloff provides a good reminder of the potential turbulence when investing in new and volatile asset classes. Perhaps some crypto investors took gains off the table to purchase a home as housing data has continued to show strength with home sales in May jumping 8% from April and 13% from May 2020. Low mortgage rates have now pushed the median sales price up to $375,000. This does not indicate we are creeping into 2008 territory. Now that younger generations are starting to purchase homes (over one-third of sales are first time buyers), the market is showing an inventory shortage. Builders were more cautious coming out of the Great Recession and now demand has finally caught up.
Looking to the remainder of the year, there is no shortage of catalysts we will be watching. Infrastructure spending is dominating the news now and should throughout the summer, or until a deal is reached. As separate legislation is attempted to pass through reconciliation, we expect some degree of tax hike headline risk. The next big Fed event comes in August at the Jackson Hole meeting. Expectations include talks of policy tightening measures to be executed later as inflation points to being transitory and as comparables from last year get tougher. We will continue to monitor the market and economy and adjust portfolios as needed to manage any downside risk.