(Rosell Wealth Management’s first office, Bend, OR 2001 | Photo Courtesy of Rosell Wealth Management)
It seems only yesterday that I moved into my first office in downtown Bend and began my own financial planning practice. It’s hard to believe how fast 20 years has gone by! Many things have changed since then; the Oxford Hotel now stands where my old office was, our team has increased from just me to five.
As we work our way out of the global pandemic and ride the heat wave of summer, the markets continue to exceed expectations to all-time highs. The second quarter brought quite good news. The broad-based advanced in equities commodities in riskier fixed-income assets accelerated as interest rates generally declined and vaccinations climbed around the world. Major stock indices improved on their already-impressive first-quarter results. Equity markets advanced together until mid-June when the U.S. pulled ahead once again.
The June surge was fueled by news from the U.S. Federal Open Market committee. The central bank announced its expectation that stronger economic growth and higher inflation in the months and years ahead would lead to an interest rate hike in 2023. The Fed’s announcement set short-term rates upward while intermediate to long-term rates continued to decline resulting in a flatter yield curve. U.S. treasury rates had been declining across most maturities through April and May after increasing during the first quarter. The Fed’s announcement that interest rates are finally projected to move higher had just as much of an impact on stocks as it had on bonds. The rotation favoring cyclical and value-oriented asset classes that had begun during the second half of last year was set back a bit by the Fed’s latest projection. Both large and small cap value stocks sold off and only partially recovered their gains thereafter. Small cap growth also sold off, but then rallied in a similar manner to large cap growth. Large cap growth stocks faltered briefly and then benefited from the strong rally into the end of the quarter.
The U.S. was the best-performing major equity market during the second quarter, which can skew our perceptions about global returns. Let’s see what happens when we exclude the U.S. We can see that the developed market equities outpaced emerging markets in the second quarter. The performance differential widened in May and remained wide from the majority of June before nearly closing the gap at the end of the quarter. The general decline in interest rates during the second quarter boosted bond prices. This was not a surprise given the inverse relationship between bond prices and yields. It comes falling a first quarter that was defined by an increase in interest rates that had a significant negative impact on fixed-income asset classes.
We can see that some of the first quarter’s hardest-hit areas of the fixed-income universe were the second quarter’s best performers. Emerging market debt, investment grade corporates performed particularly well. High-yield, a rare bright spot last quarter, did well again while inflation protected securities also delivered strong returns amid firming inflation expectations. The combination of above average economic growth, rising inflation, increased federal government spending and monetary policy aimed at suppressing interest rates is driving price gains in riskier investments. It is also creating conditions that can lead to speculative bubbles. We believe this merits watching as we look ahead. Looking backward, the last several weeks have witnessed a partial and whining of the rotation into value stocks that began last autumn. We believe this is a temporary pause in the longer-term upswing. With many countries still imposing lockdown measures to fight COVID, we believe the global recovery and expansion have a long way to go.
In today’s environment, with economies opening up and interest rates still at extraordinarily low levels, the dominant trend favors further price gains over the next year or two. Investors should take into account that the U.S. economy appears to have reached peak growth and consider the merits of diversifying with international assets. Many countries are behind the U.S. in their pace of their economic recoveries. We expect other advanced economies to record strong results in the second half of the year and into 2022, exceeding the pace in the U.S.
It is an honor to celebrate our 20th year in wealth management here in Bend as well as writing for Cascade Business News since 2003. I hope you and your loved ones have a safe and adventurous summer.
David Rosell is President of Rosell Wealth Management in Bend. RosellWealthManagement.com. He is the host of the Recession-Proof Your Retirement Podcast and author of Failure is Not an Option — Creating Certainty in the Uncertainty of Retirement and Keep Climbing — A Millennial’s Guide to Financial Planning. Find David’s books on Audible and iBooks Amazon.com as well as the Redmond Airport.
Investment advisory services offered through Valmark Advisers, Inc. an SEC Registered Investment Advisor Securities offered through Valmark Securities, Inc. Member FINRA, SIPC 130 Springside Drive, Ste. 300 Akron, Ohio 44333-2431. 800-765-5201. Rosell Wealth Management is a separate entity from Valmark Securities, Inc. and Valmark Advisers, Inc. There are risks involved with investing, including loss of principal. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Bonds and bond funds will decrease in value as interest rates rise. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only. Certain economic and market information contained herein has been obtained from published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such sources are believed to be reliable, neither SEI nor its subsidiaries assume any responsibility for the accuracy or completeness. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company (SEI).
