As I reported at the end of 2021 Q1, the financial effects of the global pandemic started to ease with many signs of a recovery. This trend continued into Q2 as the CNN and Moody’s Analytics “Back-to-Normal” Index currently indicates a value of 94% (from 86% at the end of Q1) representing more progress to a complete financial recovery. Since this an aggregate measure of financial health, however, some of the indicators and individual U.S. states are not at the same strong level so more targeted work is needed for a complete recovery. Certainly, continued strong fiscal stimulus and infrastructure spending programs combined with an accommodative Fed (despite recent hawkish comments) are in place to support the continued rebound.
I used the term “resiliency” last quarter to describe the markets and that term is apropos again as the markets continue to rebound from bouts of short-lived panic to scale higher. As seen from the table below, the S&P 500 (IVV) added to its strong 6.33% Q1 return with another 8.38% return during Q2 to produce a year-to-date return of 15.24%. Also, while not besting the S&P 500, other diversifying asset classes like small- and mid-cap equities (SCHA and SCHM) kept pace with returns of 4.75% and 5.43%, respectively. Not to be outdone, however, is the real estate investment trust (REIT) asset class with another strong quarter of 11.93% Q2 return working to recover from its negative return during 2020.
Notably, large cap high dividend value stocks (DVY), representing a “re-opening” market view, also kept pace with the broad market indices with a Q2 return of 3.05%, which when combined with its Q1 return continues to lead all the major asset classes with a year-to-date return of 23.29%. Meanwhile, other global markets including international developed and emerging market equities (SCHF and SCHE) were likewise strong at 5.77% and 4.10%, respectively.
Bond markets, coming off weakness in Q1, maintained their low return profile producing modest Q2 returns. Broad core bonds (SCHZ) generated returns of 1.76% during Q2 while investment grade corporates were stronger at 3.92%. High yield bonds (HYG) were in the middle of the pack during Q2 with a +2.01% return but bested all fixed income on a YTD basis with a total return of +2.60%.
As the equity markets seek new highs and bonds come off record low interest rates, return prospects for the future are cloudy, so caution prevails. In fact, as I reported in my May 6 blog post, Got Risk?:
But nothing is forever, and we need to be cautious. Some forecasting models, like the one at Research Affiliates, have much lower expectations for future returns due to the poor return prospects for fixed income assets and the historically high valuations for equities; this firm forecasts only a 2.1% nominal return over the next 10 years for a 60/40 portfolio!