**A video version of this report can be found in your Orion client portal.**
The U.S. investment markets continued to defy gravity in the second quarter of the year, closing out the month of June—and the first half of 2021—at new record highs. This is the fifth consecutive quarter where the U.S. markets posted gains.
Everywhere you looked in a diversified portfolio, you saw gains in the second quarter. The Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—gained 6.49% in the second quarter, up 15.36% since January 1. The widely quoted S&P 500 index of large company stocks rose 8.17% in the second quarter, to post a 14.41% return so far this year.
International investors saw their stocks rise over the second quarter, but not with the same bullish intensity that we’re experiencing in the U.S. The broad-based EAFE index of companies in developed foreign economies gained 4.37% in the second quarter, for a 7.33% return for the first half of the year. Our global equity fund, DFA Selectively Hedged Global Equity (DSHGX) which is comprised of about 50% US stocks and 50% international finished up 5.13% for the quarter, and is up 14.52% for the year.
Looking over the other investment categories, real estate, as measured by the Wilshire U.S. REIT index, posted a 12.84% gain during the year’s second quarter, and is up 22.78% since January 1. DFA Global Real Estate (DFGEX), not an apples-to-apples comparison with the US index, finished the quarter up 13.78%, and is up 19.07% for the year.
The S&P GSCI index, which measures commodities returns, gained 14.67% in the second quarter, and is now up a remarkable 30.90% for the year. The energy and metals component of the index, which is influenced by the jump in oil prices, is up 37.62% so far in 2021. Our commodity fund, DFA Commodity Strategy (DCMSX), again not an apples to apples comparison as DFA isn’t as concentrated in oil as the index, significantly under-preformed because of its underweight to oil, and is up 13.78 for the quarter and 19.07% for the year.
In the bond markets, the rates on longer-term securities jumped from historically low rates to simply low rates. Coupon rates on 10-year Treasury bonds are yielding 1.465%, while 3 month, 6-month and 12 month bonds are still sporting barely positive yields. Our high-quality bond funds, DFA Selectively Hedged Fixed Income (DFSHX), closed up 0.31% for the quarter and is even for the year. DFA Global Core Plus Fixed Income (DGCFX) is up 2.28% for the quarter, and down -1.91% for the year. Our Treasury Inflation Protected (TIPs) fund, DFA Inflation Protected Securities (DIPSX) is up 2.51% for the quarter and up 1.11% for the year, while our high yield bond fund, Vanguard High Yield Corporate (VWEHX), is up 1.12% for the quarter and up 1.26% for the year.
The equity-like portion of our model portfolios found Ironclad Managed Risk (IRONX), a strategy that sells put options on equity indices and exchange traded funds, up 4.33% on the quarter and 5.62% for the year. AQR Style Premia Alternative Fund (QSPIX), a strategy that invests long and short across six different asset groups: stocks of major developed markets, country indices, bond futures, interest rate futures, currencies and commodities based on four investment styles: value, momentum, carry, and defensive, was down 0.67%, but is up 16.67% for the year. Rounding out the mix of equity-like funds, LoCorr Managed Futures Strategy (LFMIX), formerly Steben Managed Futures Strategy, had a quarterly gain of 3.85% on the quarter and 5.65% on the year. We have these funds in our portfolio to produce returns that are not influenced by the equity markets, so they are performing as expected and much of the reason our portfolios are doing so well, relative to those without equity like exposure.
Five consecutive quarters of gains! All-time highs becoming a routine part of the news cycle! Have the markets banished volatility altogether?
Of course, the answer is no. This investment climate is not unprecedented (the late 1990s come to mind), but the current investing climate is clearly far from normal. Stock market investing always comes with a certain amount of risk, even if the risks are sometimes temporarily hidden from view.
Just a week ago, there were widespread concerns that the economy was about to experience higher inflation; a 5% single month increase in the Consumer Price Index was the highest jump in 13 years. Investors were startled, to the extent that the U.S. Federal Reserve Board felt compelled to put out a statement saying that it expected the gain in consumer prices to be merely ‘transitory.’ Apparently investors took the Fed economists at their word; a quick drop in 10-year Treasury yields, when converted to the mathematics of bond market expectations, signals an expected inflation rate of 2% or less. Of course, the biggest investor in Treasuries at the moment (to the tune of $120 billion a month) is the Fed itself, so this may be an example of a government agency fulfilling its own prophecy.
But elsewhere, there doesn’t seem to be any obvious cause for alarm. Hiring and consumer spending are rising, and small business owners’ confidence has bounced back above its pandemic lows. Congress is about to pass some kind of a stimulative infrastructure bill, and interest rates remain low. Corporate earnings are projected to come in at record levels by the end of the year.
Of course, that doesn’t mean we couldn’t hit some rough patches in the second half of the year. Investor sentiment can be tricky, and bull markets have a tendency to end unexpectedly. The new variants of COVID-19 are an unknown factor, and eventually the government will have to stop juicing the economy with ever-greater amounts of money. We ought to be able to enjoy the gains we’ve experienced so far in the year without trying to project them out into the unknown future.
Wilshire index data: https://www.wilshire.com/indexcalculator/index.html
Russell index data: http://www.ftse.com/products/indices/russell-us
Nasdaq index data:
International indices: https://www.msci.com/end-of-day-data-search
Commodities index data: https://us.spindices.com/indices/commodities/sp-gsci
Treasury market rates: https://www.bloomberg.com/markets/rates-bonds