Q2 2021 Commentary Letter: Beyond the Peak

The US recovery is alive and well. And financial markets loved it in Q2. 

Even the persistent high numbers on inflation and a hawkish shift in signals from the Federal Reserve could not dampen spirits. The S&P 500 ended the quarter up 8.6 percent, and the MSCI world index 7.4 percent, from the end of March. Businesses added 1.7 million jobs to payrolls over the quarter, and GDP growth hit what will probably turn out to have been its fastest pace for decades – as well as the peak growth rate for this recovery.

The economy was powered last quarter by fiscal as well as monetary policy. Swift passage of President Biden’s $1.9 trillion recovery plan in Q1 continued to buoy output in Q2, even as Congress deadlocked on the next installment of President Biden’s spending plans. The White House is hoping that the third quarter will see Congress come together again on spending – with enough Republicans supporting a trimmed down infrastructure plan to get past a filibuster. If the stars align fully for President Biden, this will be followed by agreement on a budget bill with higher spending for climate and family care, offset—in part—by higher taxes. The budget can pass, under Senate rules, with just 50 votes and a tie break from the Vice President. The path to agreement is narrow, not least because of weak support for increased taxes on corporations and the wealthy and deficit concerns if taxes are not raised. The odds still favor passage of at least some new spending on badly needed infrastructure. The terrible collapse of a 40-year-old building in Miami on June 24 showed the importance of building back better—and more resilient—by private as well as public sectors. Investors reducing fixed income allocations are looking for more real asset and infrastructure investments. 

Whatever the fate of the legislation, consumers and businesses are now adding their spending to the tailwinds from fiscal and monetary policy. That means growth will continue to be strong in the second half of 2021 – strong enough to make further inroads into unemployment. But look for a slowdown from the Q2 peak speed. In some ways, that will be a good thing, lowering the risk of an inflationary upset. The Fed will be watching for warning signs that inflation—which has surprised on the upside—is becoming permanent rather than transitory. They will also hope for more progress toward full employment.


In Europe, a slow start to vaccinations in Q1 meant that the region’s economies took longer than the US to pull out of recession. European Central Bank President Christine Lagarde warns that the recovery there is still fragile. But as vaccination rates accelerated in Q2, so did growth, and European equities have done well, outperforming Japan and Emerging Markets last quarter. The spread of new Covid-19 variants, notably the Delta and Delta-Plus variants, has raised some questions about the summer opening in Europe. Vaccination rates have been highest in the UK so far, but the rate of new infections there has accelerated also, predominantly among the still unvaccinated.  

For much of the rest of the world, vaccinations are still far below what is needed to combat Covid-19. New and more dangerous variants have more of a chance to develop and spread in unprotected populations, but they pose a risk to everyone as they can jump across borders. For almost 18 months now, economists have had to combine health projections with economics. As the world opens up again, all of us—investors, workers, business leaders, teachers, parents, policymakers—will have to keep one eye on the latest coronavirus news.

At RockCreek, as in many other firms, we had more people coming into the office this quarter. It was mostly delightful to mix and mingle with colleagues again. But differing health and family status means hybrid work and varying norms around mask-wearing and social distancing. After so many months of Zoom meetings, it turns out that going back to the office presents new technological and personal challenges. But for many people, the energy generated by working together while keeping a safe workplace will continue for the rest of 2021 and likely into 2022.

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