Second Quarter 2021 (April - June)
Since our last update, the vaccine rollout is now in full effect in the U.S. and our society and economy are quickly getting back to normal. Internationally, the vaccine rollout is going much more slowly, but should accelerate as we move through the summer. The stock market has performed well for the first half of 2021, reflecting the expectation of better economic activity.
Looking forward, much of the discussion centers around the direction of interest rates and inflation. The Federal Reserve continues to support low interest rates to boost the economy. As a result, interest rates remain historically low, which in turn, is pushing stock prices higher.
The Fed, along with many economists, believe that the recent increase in inflation is transitory due to supply constraints. It is their belief that inflation will normalize as the supply chain improves.
In recent months, the government has reported inflation numbers in excess of the Fed’s 2% target. If you have been to the grocery store, tried to buy furniture, or have had work done on your home, you have probably experienced higher prices. Many items are also out of stock as businesses struggle to meet the surge in demand as we return to normal activity. The Fed, along with many economists, believe that the recent increase in inflation is transitory due to the supply constraints. It is their belief that inflation will normalize as the supply chain improves. However, many others are asking if the Fed will need to raise rates sooner than expected as current stimulus, along with the expected infrastructure bill being debated in Congress, works its way through the system. This is a very fluid situation and something we are watching closely.
For bond investing, we do not feel much has changed. Interest rates remain low. And it is still our view that buying long-term bonds at such low rates is not advisable. We continue to expect to hold larger cash balances and short-term bonds. If rates begin to rise, we will reassess our bond holdings as we attempt to take advantage of higher rates.
We hope this letter finds you and your family safe and healthy. If you have any questions, please do not hesitate to call us.
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This article can provide only a general understanding of sometimes difficult financial concepts. For for a more thorough explanation, or if you have questions about your own portfolio, please feel free to reach out to us here at McRae at (973) 387-1080.