DWM's 2Q21 Market Commentary

July 09, 2021


Happy belated 4th of July! The second quarter was full of fireworks indeed as the stock market rocketed up! With Covid in retreat and many Americans heavy with cash thanks to stimulus measures, the economy is rocking. They’re estimating 2q21 GDP growth to be about 8%. Wow! If we look at high frequency data, we can see how amazing things are, e.g. TSA traveler traffic only down 21% and hotel occupancy down 10% since two years ago. Of course, not everything is rosy. Covid and the new Delta strain is still lingering and most countries lag the US in vaccination rates and thus the battle against it. With about half the US states still providing enhanced employment benefits, employers are struggling to find good people to meet pent-up demand. Wage growth in June was 4.6%, the highest reading since 1983! And, of course, big topics include supply chains across the globe and inflation. So what does this mean for your portfolio? Well, let’s take a look at how the major asset classes fared in 2Q21:

Equities: The stock market rally continued in 2Q21, with the S&P500 up 8.5%, the MSCI AC World Index up 7.2%, and the MSCI AC World Index ex-USA (a good international proxy) up 5.5%. Large cap growth staged a comeback and outperformed value as shown by the graph below. That being said, we don’t think the value trade is dead and believe a balanced portfolio approach is the right play for this environment.

Fixed Income:  After one of the worst starts in decades, bonds, as represented by both the Barclays US Aggregate Bond Index and the Barclays Global Aggregate Bond Index, bounced back slightly, up 1.8% and 1.3%, respectively. That said they’re still in negative territory for the year. Fortunately, prudent fixed income management like keeping duration low and taking advantage of non-core fixed income areas like emerging market bonds (up 4.2%* in 2Q21)  can really help.

Alternatives:  It was a strong quarter for most alternatives with the Wilshire Liquid Alternatives Index (“WLAI”) up 2.3%. Given the inflation scare, commodities were a great place to invest, up 12.7%** for the quarter. Real estate, particularly residential, continued to soar – our favorite real estate play, James Alpha Global Real Estate Fund, was up 8.3%.   


To sum it up, it was another good quarter for the balanced investor. Half way through the year, a balanced investor may be enjoying high single digit returns for the 2021 calendar year. More aggressive risk profile investors with a heavier allocation to stocks may be enjoying double-digit mid-year returns! But the question is can the good fortune continue?

We think it can. Europe, Japan, and China will catch up with the US on recovery so the global economy should be booming by end of the year. The Covid recovery pent-up demand/supply chain disruption story are contributing to spiking commodity and other prices, but we continue to see that as “transitory”, meaning once things return to “normal”, it will be under control. Supporting this notion is the 10-yr Treasury yield dropping 0.3% in June and the yield curve flattening significantly. And yes, the stock market has come very far very fast, but multiples are actually coming down as companies keep posting even higher earnings. See graph below.

In conclusion, with the pandemic somewhat in the rear-view mirror, most people are feeling good not only to be alive but with account balances near all-time highs. But as we said before, we would be amiss not to remind people that the stock-market is forward-looking. In other words, it has spent the last year thinking ahead to the economic recovery that we are in the midst of. What happens when it starts looking past that recovery? It’s inevitable that this short-term growth must come back to normal levels. The euphoric goldilocks conditions – at least for the stock market – will no longer be there. There’s no rule that says that the stock market goes up because the economy is going up – remember that Wall Street is not Main Street. It’s time to get back to realistic expectations and be ready for what’s next. If you aren’t prepared for that, contact your friendly wealth manager to get you ready.

Brett M. Detterbeck, CFA, CFP®


*represented by the Stone Harbor Emerging Debt Fund

**represented by the Eaton Vance Parametric Structured Commodity Fund



Detterbeck Wealth Management is a fee-only financial planning / wealth management company with offices located in Palatine, IL (Chicago area) and Charleston, SC areas serving clients locally and across the country. To contact us about setting up an appointment, please see our contact us page