The U.S. economy grew during the first quarter of 2021 (most recent) at a 6.4% annual pace after contracting at an annualized rate of 3.5% for 2020 as COVID-19 shut down the economy. GDP is expected to continue growing as COVID restrictions ease. The Biden Administration is working on a scaled-down infrastructure plan improving roads, bridges, and broadband access to further boost the economy. The plan is facing resistance. Nonfarm payrolls rose by 850,000 in June as the unemployment rate ended the quarter at 5.9%, still above pre-recession levels. A pattern of strong wage growth is underway. About 7 million Americans remain unemployed due to the pandemic. Consumer confidence rose sharply in June. Consumer spending, which makes up over two-thirds of the economy, is expected to remain strong in the second half of 2021. Retail sales unexpectedly increased in June as demand for goods remained strong even as spending is shifting back to services. Core CPI, which excludes food and energy prices, rose 4.5% in the 12 months through June - the largest move since September 1991. Headline CPI rose even higher – up 5.4% through June. One-third of headline CPI is from used-car prices. At the June Federal Open Market Committee meeting, the Fed stood by its position that inflation pressures are transitory and will subside once pent-up demand and supply bottlenecks clear.
The Fed is just beginning to deliver more hawkish messaging as it starts to think about scaling back the pace of its pandemic bond buying while moving up its timeline for raising short-term lending rates. The central bank is signaling rates could rise beginning as soon as early 2023. The yield on the 10-year Treasury note ended the second quarter at 1.45%, while the 30-year Treasury bond yielded 2.06% (both falling during the quarter). Emerging market (EM) bonds and investment-grade corporates reported the strongest fixed income returns in the quarter, up 3.9% and 3.6%, respectively. After losing over 3% in the first quarter, the Bloomberg Barclays U.S. Aggregate Bond Index gained 1.8% in the quarter. 3-month Treasury bills had the lowest fixed income return in the second quarter, up 0.01%, followed by mortgage-backed securities, which were up 0.3%.
The S&P 500 ended the second quarter up 8.6%, with all sectors reporting gains except for utilities. Real estate, technology, and energy were the strongest sectors in the quarter, up 13.1%, 11.6%, and 11.3%, respectively; utilities, consumer staples, and industrials had the weakest returns. Utilities were down modestly by 0.4%, while consumer staples and industrials were up 3.8%, and 4.5%, respectively. Large growth outperformed large value while small value modestly outperformed small growth for the quarter. The forward P/E for the S&P 500 ended the quarter at 21.5x, above the 25-year average of 16.7x. The index's 10 largest stocks traded at 30.0x.
International markets continued to lag U.S. markets. The MSCI World ex-USA Index (includes developed countries) and the MSCI ACWI ex-USA Index (includes developed and EM countries) gained 5.9% and 5.6%, respectively, in the quarter. EM equities increased 5.1%. Latin America and EM Europe had strong returns, up 15% and 14%, respectively, while EM Asia increased 4%. Brazil rebounded in the quarter jumping 23%. India and China increased 6.9% and 2.3%, respectively.
The Bloomberg Commodity Index continued to climb during the second quarter mainly from strength in crude oil and agriculture prices. The index increased U.S. crude oil prices jumped 24% to $73/barrel in the quarter as global demand continues to recover. Gold inched up 3% to $1,772/ounce in Q2 but is down from its year-end price ($1,895/ounce), acting as a safe haven during the pandemic. After climbing to historic heights this spring, the lumber bubble burst, as lumber futures retreated more than 40% in June alone. The quick reversal came as Americans started to go on vacations again instead of taking on renovation and building projects. After a strong first quarter, REITs jumped 12.7% in the second quarter aided by an improving economic outlook; the sector was the worst-performing asset class in 2020.
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