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Investment Letter

2nd Quarter 2021

The resurgence of normality has been a refreshing change for 2021 as the country’s overall health continues to improve. Summertime vacations, days of relaxation, and activities we took for granted last year are thankfully back on the agenda. Over the coming months, we are excited for a return to many of life’s simple celebrations. As a nation, let’s start by celebrating and supporting Team USA in their quest for excellence at the Tokyo Olympics. GO USA!

At the year’s mid-point, the U.S. economy is still celebrating the end of the financial crisis.   The constraints and restrictions of 2020 are fading, and the economic recovery continues to be invigorated by significant growth, job increases, manufacturing activity expansion, healthy business profits, and strong consumer spending. Sustaining a recovery of this scope requires a high-powered fuel and the pandemic provided it. Large levels of pent-up demand, unprecedented fiscal and monetary stimulus, and the development and distribution of the COVID vaccine furnished the necessary stimuli for consumers to rapidly reopen the economy and create a sizzling summer of optimism.

Bolstered by investor confidence and improved economic conditions, the financial markets delivered another exciting quarter of performance. The Dow Jones Industrial Average (DJIA) celebrated its 125thbirthday and surpassed the 34,000-point mark during the quarter. The index (originally comprised of 12 companies) has advanced a long way since its first close on May 26, 1896, at 40.94 points. The achievement of the current milestone is impressive considering the DJIA broke the 1,000-point mark in 1972, the 10,000-point mark in 1999, the 15,000-point mark in 2013, and ended June 30, 2021, at 34,502.51 points. Good fortune continued for the S&P 500 Index as 20 new all-time closing highs were established during the recent three-month period. The domestic large company stock index finished the quarter with a total return of 8.55% and closed on a high note at 4,297.50 points.  The recent success is also historically remarkable considering it took over 16,000 trading days (1950-2014) for the S&P 500 to reach the 2,000-point level on August 26, 2014. 

Just as a rising tide lifts all boats, the rising momentum in the financial markets advanced the performance of most asset classes. During the quarter, international and domestic small company stocks enjoyed positive returns, the tech sector increased, real estate continued its strong run with a third consecutive quarter of double-digit returns, and commodities and natural resources benefited from market imbalances. In addition to the solid quarter performance, year-to date returns for stock asset classes were outstanding. Unfortunately, bonds and cash continue to be weak performing asset classes for investors. See the attached table for quarter and year-to-date performance of major asset class indices. 

The recent Federal Open Market Committee (FOMC) meeting minutes and Beige Book report confirmed the improvement in the economy due to the successful progress of COVID vaccinations across the country, strong policy support, and the flow of credit to U.S. households and businesses. While conditions remained accommodative, the FOMC communicated some economic weakness due to employment well below pre-pandemic levels, shortages of material inputs, and hiring difficulties. The Committee also noted higher inflation measures but believed the increase to be temporary and a result of transitory factors. Over the first half of 2021, the FOMC held its policy rate near zero and continued the asset purchase program in support of the economy. The Committee expects to continue this stance on monetary policy until it achieves maximum employment and long run inflation around two percent.   The Fed recognized the ongoing virus risk to the economic outlook, and they remain committed and prepared to use a full range of tools to support and promote their policy goals. 

The latest inflation measure of 5% was last experienced about 13 years ago (August 2008), so it is easy to see why consumers were spooked at the news. We agree with the Fed and support the theory of a trend in higher prices as a temporary demand shock. After being locked away for months, consumers had excess spending capacity. Dollars spent on goods and services accelerated faster than supply chains could replenish. These demand and supply imbalances ended up driving large price increases. Lumber commodity prices provide an example of a recent demand and supply imbalance. In early 2020, the spot price (current commodity price) for lumber traded in the low $400 range. The combination of housing construction and home renovation during the pandemic skyrocketed demand for lumber beyond the supply capacity of producers. At year-end 2020, spot prices approached $900 and continued upward to reach a peak of $1,686 on May 7, 2021. By the end of the second quarter, supply levels stabilized, and spot prices were down to approximately $700. Consumers caught with the need for lumber during the peak period earlier this year drastically overpaid based on a temporary demand and supply imbalance not because lumber was a scarce resource. Fortunately, supply bottlenecks and input shortages for many goods will not be permanent, but they will take time to resolve. 

Our outlook for the economy remains optimistic. We believe the fuel powering the domestic recovery is sufficient to sustain further progress, and the $1.9 trillion American Rescue Plan (March 2021) will provide additional support into 2022. Labor market gains are vital for the success of the expansion, and the recovery of over 60% of the total loss since April 2020 is noteworthy. However, there is still room for improvement. Labor supply is lagging demand due to prolonged unemployment benefits, early retirements, and lingering pandemic worries. We are hopeful that as barriers recede, a timely increase in the workforce will occur later this year. We anticipate strong spending conditions by consumers and businesses. This should push economic growth measures higher over the short-term before moderating. Our recent inflation concerns are warranted, but we don’t foresee an acceleration or a long-term sustainment of inflation at 5%. We believe the Fed’s transitory assessment is the likely cause for the unexpected increase. As imbalances fade, inflation measures should also subside. We expect healthy corporate fundamentals to continue, but economic headwinds on the horizon (slower growth, higher wages, higher interest rates, higher corporate taxes) could hurt future profitability.

We expect Central Banks to continue their extremely accommodative monetary policies in support of the global economy. The Federal Reserve is poised to maintain their current strategy of asset purchases, low interest rates, and average inflation above two percent until “substantial further progress” has been made in the labor markets toward maximum employment. The European Central Bank strategy has mirrored the Federal Reserve’s but without the same success due to the delay in vaccinations and prolonged restrictions. As the vaccine distribution evolves, we are hopeful economic momentum will accelerate and provide a boost to the international economic recovery.  

Fiscal policy changes are still a work in progress for U.S. policymakers. The infrastructure and social program plans outlined by the Biden administration continue to be negotiated. We expect more details later this year on this topic and the proposed increases in taxes for corporations and wealthy individuals.

We believe the second half of 2021 will be prosperous for the global economy, but we have also identified a list of potential concerns. The uncertainty revolving around the COVID “Delta Variant” is a major issue in our opinion. If pandemic conditions escalate again, the return of mandated restrictions would certainly be a significant blow to the economic recovery and expansion. Additional items of concern include the following: labor market imbalances, unexpected Central Bank actions, U.S. infrastructure and tax debate, growing fiscal stimulus debt, sustained inflation, political disfunction, extreme weather events, natural disasters, cyberattacks, terrorism, and escalating geopolitical tensions. The past has shown how fragile the global economy can be, so we are keeping a watchful eye on these and other threats as they develop.

Our investment philosophy remains based on the fundamentals. We believe it is time---not timing---that matters most. History shows the successful long-term investor is patient, weathers market swings, and adheres to a disciplined investment process that includes a diversified asset allocation strategy based upon a tolerance for risk and need for return.

As we mentioned, tax code changes are currently being negotiated, and increases in tax rates are not the only items being debated. Tax treatment of inherited property (stepped-up basis) and treatment of gift bequests are two areas under review. If you are considering future gifts, this could be a good time to review your gifting strategy for applicable changes. A financial check-up is a great way to evaluate your financial health, highlight adjustments needed, and develop and implement a plan for success. If you would like to discuss changes to your financial situation, schedule a meeting, or have any questions, please contact our office.

In closing, I want to thank you for the opportunity of working with you and for your continued confidence and trust. 

Have a safe and enjoyable summer!

With kindest personal regards, I am

Very truly yours,


2021 Total Return Index Performance
Asset Class
2nd Qtr.
BofA/ML Three-Month U.S. Treasury
U.S. Bonds
Barclays Intermediate-Term Treasury
U.S. Large Co. Stocks
S&P 500
U.S. Small Co. Stocks
Russell 2000
International Stocks
MSCI EAFE (net div.)
Real Estate
DJ Select Real Estate Securities Total Return
Source: Morningstar


    U.S. Economic Data



6.4% increase (annual rate) – 1stQuarter 2021



3.8% CPI (less food and energy) and 5.0% CPI (all items) over last 12-months ending June. (Energy index up 28.5%)


Interest rates

Federal Funds Rate range = 0.00 – 0.25%. Fed will maintain until labor markets improve further.



June 2021 data - Unemployment at 5.9%; non-farm payroll employment rose by 850,000 jobs; Labor force participation rate 61.6%; Job growth was widespread.



Manufacturing activity expanded for the 13thconsecutive month; June ISM Manufacturing Index registered at 60.6; High demand levels, long raw material lead times, wide-scale shortages of material, rising prices and transportation difficulties continue to affect all segments.


Business Spending

Private non-residential investment improved past pre-COVID levels; New durable goods orders increased further to levels last seen in March of 2019.   


Corporate Profits

1stQuarter 2021 - U.S. corporate profits increased by 2.4%. S&P 500 Earnings Per Share = $47.41.



May 2021 year-over year data - New home sales up 9.2%; Existing home sales increased 44.6%; Median sales price of existing homes rose 23.6% ($350,300); Housing starts up 50.3%; Building permits increased 34.9%; Housing inventory decreased 20.6% from last year; Unsold current inventory = 2.5-month supply; MBA fixed 30-yr mortgage rates = 3.20% ending 06/30/2021


Consumer Spending

Disposable income weakened; Consumer Confidence Index improved further in June to its highest reading since the onset of the pandemic (an indication of support for strong economic growth); Retail and food services sales increased year over year; Total vehicle sales turned downward; Personal durable and nondurable spending remained elevated; Personal savings rate declined (higher spending).



Oil price (West Texas Intermediate) = $73.52/bbl – 06/30/2021 (2ndQT increase of 24%); Gas price (U.S. average regular unleaded) = $3.091/gal – 06/28/2021 (2nd QT increase of 8%)


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