Here are the charts and themes that tell the story of the first six months of 2021…
The scourge known as Covid-19 started the year at its most prevalent level to date.
But the bad news wouldn’t last long. Things were about to change, and change for the better.
On January 6, hospitalizations in the U.S. peaked once and for all.
The speed of the decline from there was nothing short of miraculous, stemming from a combination of widespread vaccinations and natural immunity. By the end of June, hospitalizations were down to their lowest levels of the pandemic, over 90% below their high in January.
More than 54% of the U.S. population (178 million people) have now been vaccinated, an extraordinary effort in such a short period of time.
But this doesn’t tell the whole story as Covid-19 fatality rates rise exponentially with age.
Which is why it was critically important that vaccination efforts were focused on the most vulnerable groups first, including the elderly. With over 90% of those 65 and older now vaccinated, that has made an enormous difference in outcomes as this age group (65+) has accounted for over 80% of Covid-19 deaths.
The result: a remarkable reduction in severe illness, with daily Covid-19 deaths down 93% from their peak.
With the U.S. approaching herd immunity and the risks from Covid-19 plummeting, the great reopening of America has taken hold. What does that mean?
More traveling, more gatherings with family and friends, and more fun.
The evidence of this can be found everywhere you look, most especially in the airline data.
There are now over 2 million air travelers per day in the U.S., with the gap between current and pre-covid levels closing fast.
As travel, leisure and hospitality sectors recover, jobs are coming back at a record clip. 3.2 million jobs were added in the first six months of the year, with total employment now only 4.4% below its pre-covid high.
The good news? This trend is likely to continue in the coming months as the economy continues to reopen and extra unemployment benefits come to an end.
A stunning fact: there have never been more jobs openings in the U.S. than there are today. Businesses are ready and willing to hire with a shortage of available workers constraining many industries.
III. The Free Money Effect
The reopening of the economy coincided with an unprecedented boom in retail sales. As it turns out, if you give the American consumer free money, they will spend it.
We learned that lesson in spades after the first round of stimulus checks in 2020 and once again in 2021 with two additional rounds.
The last bill, with tax-free payments of $1,400 per person going out in March, was the largest yet. That left the American consumer in a better position than ever before.
The resultant rise in spending was staggering. By the end of April, US Retail Sales stood a full 18% above pre-covid levels.
To meet this increase in demand, manufacturers ramped up production to levels not seen since the early 1980s.
The effects of the stimulus and boom in consumer spending were widespread, particularly in the inflation numbers.
The classic definition of “demand-pull” inflation took hold with “too much money chasing too few goods.”
A few examples…
- Overall inflation of 5.4% in the last year (highest since 2008) and core inflation (excluding food/energy) of 4.5% (highest since 1991).
- Producer price increases of 7.3% (overall) and 5.6% (core).
- Core Personal Consumption Expenditures (PCE), the Fed’s preferred measure of inflation, increasing by 3.4% (highest since 1992).
- Used car prices were up 34% in the last year, the most dramatic surge we’ve ever seen.
- Home prices rose 14.6%, the highest annual rate of increase ever.
- Commodity prices were up 110% from the lows in 2020 and at their highest levels since 2015 (CRB Index).
- Copper hit a new all-time high in May, surpassing its previous high from 2011.
- Crude Oil was up 87% in the last year, at its highest level since 2018.
- US Gasoline prices rose to $3.23 per gallon, their highest since 2014.
One might think the many examples above would qualify as evidence of “actual” inflation, but the Fed remains unconvinced…
At every turn, they have taken a dismissive stance on rising prices, saying it’s just “transitory” and therefore can be safely ignored.
To monetize the skyrocketing debt load and justify continued monetary easing, which they view as having no negative consequences whatsoever.
National debt rose above $28 trillion in March and closed out the first half of the year at $28.5 trillion. This is an increase of over $5 trillion from pre-covid levels, with no end in sight (more borrowing is expected with the infrastructure bill and “american families plan” in the works).
The Fed continues to buy a good amount of the new debt issuance with an expansion of their balance sheet to over $8 trillion, more than double pre-covid levels.
Despite inflationary pressures and an expectation that real GDP growth will exceed 6% this year (highest since early 1980s), the Fed has maintained that 0% interest rates will still be necessary at least until 2023.
Maintaining 0% policy has pushed the real Fed Funds Rate down to -5.4%, the lowest real central bank rate in the world.
Most of the world is doing the same, maintaining ultra-easy monetary policies in spite of higher growth and inflation.
VI. Rolling Manias
The combination of easy money policy and free stimulus checks boosted investor sentiment to levels we haven’t seen since the dot-com bubble, and was the perfect backdrop for a mania to take place. Instead just one, though, we saw many.
Just a few of the highlights…
- Bitcoin ($BTC) rose to over $64,000 by mid-April, more than double where it started the year and pushing its market value to over $1 trillion.
- In early May, Dogecoin ($DOGE) rose to a market value of $87 billion, higher than 408 companies in the S&P 500. This was an increase of over 11,000% from where it entered the year.
- Averaging more than a billion a day, SPAC IPOs would surpass their record 2020 issuance by mid March and end the first half at $111 billion.
- Meme stocks became a cultural phenomenon, propelled by retail investors on Reddit (r/wallstreetbets) squeezing the heavily shorted Gamestop ($GME). At one point near the end of January, Gamestop had risen to a market cap of $35 billion, 27x higher than where it began the year.
- Another favorite among Reddit traders, AMC ($AMC), surged to a market value of $33 billion in early June, a 70x increase from the start of the year.
- My personal favorite was the 12,000% rise in Signal Advance ($SIGL), which surged on the mistaken belief that it was a messaging company (Signal) referenced in a tweet by Elon Musk.
But it wasn’t all sunshine and rainbows. It never is in markets. There’s always risk and it’s only a matter of time before investors experience it…
- Bond market investors would learn this right out of the gate, with interest rates rising on increased supply, higher growth, and inflation fears. By mid-March, both 10-year and 30-year Treasury yields would move back to pre-covid levels.
- With rates rising, bond prices fell. Bonds were on pace for their worst year in history in March, down over 3.6%. While rates would fall again from there and prices bounced back, bonds still finished the first half down 1.6%.
- Two of the most fomo-inducing segments of the market in 2020 and early 2021, SPACs ($SPAK ETF) and high growth tech names ($ARKK ETF), both incurred drawdowns of more than 30% from mid-February to mid-May. This coincided with a relative crash in high momentum names while valued stocks rallied.
- Meme stocks would undergo a number of stunning crashes after parabolic advances. Gamestop’s decline of over 90% from its January high to its February low was just one example.
- Bitcoin would suffer a more than 50% correction from its May high and other crytpo assets experienced even larger declines.
VIII. Triumph of the Optimists
Despite pockets of weakness, it was still a great first half for risky assets overall.
Supporting the advance was the v-shaped recovery in earnings, which hit a new high in the first quarter for the first time since 2018.
The S&P 500 would tag 34 all-time highs (on pace for the most since 1995) and end June up over 15% on the year.
The median equity return globally was over 10% with the U.S. outperforming once again.
High Yield credit spreads moved down to their tightest levels since 2007 with yields moving below 4% for the first time, a new all-time low.
Volatility was crushed with the $VIX moving back to pre-pandemic levels.
All 11 S&P sectors would finish in the green, with beaten-down Energy (+45%) and Financials (+26%) leading the way.
Rising energy prices helped commodities best all major asset classes in the first half ($DBC +31%).
US Junk Bonds ($HYG) led all major bond segments (+2.6%) while longer duration Treasuries finished lower on rising rates (30-year yield rising from 1.65% to 2.07%).
U.S. real GDP grew 6.4% in the first quarter (annualized) and is expected to hit a new high in Q2.
As for the top two meme stocks ($GME and $AMC), they surprised many in holding on to much of their gains, with AMC leading all Russell 3000 stocks and GameStop coming in at #3.
All in all, it was a triumph of the optimists once more.
IX. The TL;DR Recap
The TL;DR recap of the first half of 2021…
- Pandemic: peak US prevalence in early January, >50% of population vaccinated, sharp decline in hospitalizations/deaths, approaching herd immunity.
- Economy: >6% real GDP growth expected in 2021 with a new high in output expected by Q2.
- Stocks: More all-time highs (33 of them in the first half), volatility back to pre-pandemic levels.
- Junk Bonds: All-time low in yields, spreads back to 2007 levels.
- Treasury Bonds: Yields rising to pre-pandemic levels by mid-March, then lower. Curve is steeper overall, helping financials.
- Housing prices: All-time highs with record increases over the last year.
- Commodities: Leading all asset classes with Crude Oil at highest levels since 2018 and Gasoline highest since 2014. Copper also hit a new record high during the first half.
- Central Banks: Fed still easy and promising to remain so until 2023. Some emerging market banks are starting to tighten (ex: Brazil, Mexico, Russia, Turkey).
- Bitcoin: Doubled, then >50% correction.
X. Have a Great Summer
These were the charts and themes that told the story of the first half of 2021. As always, the narratives followed prices.
As prices change in the back half of the year, the narratives will change as well.
- Where will the S&P 500 end 2021?
- How about the 10-Year Yield?
- Where is Crude Oil headed?
- Is Gold or Bitcoin a better investment here?
- Will higher inflation persist or is it all transitory?
- How long will the Fed hold rates at 0%?
- Is there another recession coming soon?
I don’t know the answer to any of these questions.
As Lao Tzu said, “those who have knowledge don’t predict. Those who do predict don’t have knowledge.”
What’s the alternative?
Weigh the evidence as it comes, invest based on probabilities, be forever humble and thankful, and leave the predictions to those whose job it is to entertain. That’s the best you can do in this fickle business of investing – try to find the right path for you and stick with it long enough to reap the enormous benefits of compounding.
In the last 6 months of 2021, I predict one thing and one thing only: you will see many more surprises. That is the nature of markets.
If we can help guide you on your path, reach out.
Have a great summer!
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