Economic recovery

The global economy led by the U.S. continues its gradual recovery—supported by economic reopening and COVID-19 vaccine distribution. Stronger consumption is expected through 2021 fueled by consumers with excess savings and pent-up demand for goods and services. The recovery ends as the services sector catches up to the manufacturing sector’s recovery. In this environment, average market returns are expected during the next couple of years with some upside risk.

Equity markets

The S&P 500 gained 8.2% in the quarter leading to a 14.4% return for the first 6 months of the year. Similarly, the S&P/TSX Composite Index was up 7.8% in the quarter and 15.7% for the first half of the year. S&P/TSX Composite growth was partly due to high oil prices, which were up 24% in the last 3 months and 51% in the last 6 months. The global economic recovery is expected to bring continued high demand for commodities and crude, contributing to higher S&P/TSX profitability for the rest of the year.

The United States

The U.S. economy bottomed in the summer of 2020 and shifted from contraction to recovery. Since August, the U.S. ISM purchasing managers’ index (PMI) shows a material increase in manufacturing activity on a month over month basis. Macro indicators suggest 2021 will see a strong earnings growth environment that may include a recovery back to 2019 levels, and even stronger growth with the release of pent-up demand and excess personal savings. The S&P 500 gained 8.2% in the quarter leading to a 14.4% return for the first 6 months of the year. Over the summer, the combination of a potentially less accommodative U.S. Federal Reserve, a peak in economic growth, and heightened valuation suggests a strong likelihood of choppy markets. However, investors are holding a historic amount of cash in their accounts, which makes it difficult for pullbacks to deepen into corrections or bear markets. In May, we saw a pullback of roughly 4% before cash found its way back into investments. The ingredients remain in place for any pullback to be fleeting.

Emerging markets

In global markets, the MSCI EAFE index was up 4.4% in the second quarter, leading to a 7.3% gain for the first 6 months of the year. The International Monetary Fund projects that many regions around the world—especially emerging and developing Asia—could grow faster than the U.S. in 2021 and 2022. On a year‑over‑year basis, global exports for the 5 largest exporters in the world seem to be improving with China leading the way.

Inflation

In the near term, exceptionally low interest rates are likely to remain around the world. However, the Fed’s monetary inflation coupled with the trillions in fiscal stimulus by the U.S. federal government has resulted in a steeper yield curve. In this environment, we believe credit does well and short duration bonds outperform longer duration bonds. Credit defaults will continue through the recovery due to the effect of COVID-19 lockdowns. In this regard, security selection and careful credit analysis is of paramount importance.

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