Quarterly Market Review: Q2 2021


It's a Hot Summer 2021


Hope you all are enjoying summer! It’s still hard to believe we had temperatures over 110 degrees here in Oregon. When temperatures get unnaturally high, we all look for ways to cool off and hope the temperatures come down. Kind of like the markets.


The latest inflation data was hot, showing an increase of 5.4%, the largest increase in prices since August 2008. We see increases in home prices, food costs, and most anything we purchase these days. While some commodity costs have moderated, notably oil and lumber, there are persistent concerns in some corners of the market that the Federal Reserve is acting too slowly to stem inflation. The Fed’s general approach is that the broad economy is experiencing transitory supply shocks as the economy revs up and customer demand picks up after an easing of COVID-19 restrictions across the country.


U.S. stocks continue to do well despite concerns over new Covid variants. Re-openings, improving employment, inflation, and other factors are driving the market higher. U.S. Equities were up 8.24% for the quarter vs. an average quarterly gain of 2.2%. International, Emerging Markets and Global Real Estate markets also had a strong Q2. Emerging markets have struggled this week because of the Chinese government’s crack-down on big Chinese technology companies and their growing independence brought about by their scale.


Bonds, surprisingly, gained in price as rates declined in the quarter. This is the current market conundrum. How can we have 5.4% inflation, but a 10-year Treasury bond paying 1.40%? The bond market seems to be giving the Fed the benefit of the doubt that inflation will moderate over the coming quarters. At Taurus Capital, we are keeping a lower risk profile relative to rising rates.


Overall, interest rates are very low, so there is little financial benefit to owning longer term bonds which are negatively impacted by inflation. Client portfolios are mostly positioned to hold shorter-term debt and floating-rate debt, both of which should do well if interest rates meaningfully rise.

Re-starting the economy is bound to create some hiccups as supply chains get worked out and markets receive more data that indicates how things are going. Should inflation stay persistently high, you can expect greater market volatility, but over time, companies pass along prices increases to consumers to survive. It is those price increases, coupled with efficiency gains, that help companies’ stock keep pace with inflation.

Economic Indicators at a Glance

Below is a snapshot of key top-line economic indicators.

Data source: Trading Economics. 2021.

Market Summary Second Quarter 2021 Index Returns


Stocks were up across the board, while bonds around the world were down in Q1.

U.S. Stocks

Second Quarter 2021 Index Returns


With the declining interest rate period, we saw a return to market leadership in the large computer related companies. Last quarter, small U.S. companies won out, but this quarter returned favor to the mega cap technology companies like Apple, Amazon, Facebook and Google.

International Stocks & Emerging Market Stocks

Second Quarter 2021 Index Returns

International and Emerging Market stocks were positive for the quarter. Many of these markets have spotty vaccination rates which could disrupt companies dependent on others. Many emerging market companies tend to be natural resource based economies. With declines in oil, wood, food, etc. we saw some softening of those markets.


In the currency market, the Fed’s stance helped the U.S. dollar perk up in June after sharply declining for most of the quarter.

Fixed Income

Second Quarter 2021 Index Returns

The bond market remains elevated from a year ago and even 6 months ago, but rates are still surprisingly low considering the inflation figures being posted. Low rates help support higher stock market valuations. U.S. bonds as well as global bonds has positive returns in the quarter.


Despite the positive quarter, the bond market sent the yield of the 10-year note down 29 basis points to 1.45% from a recent high of 1.74% in the first quarter.

High-yield bonds have outpaced both government and corporate bonds throughout the year. High-yield bonds gained 2.7% during the second quarter and hit mid-year up 3.6% for the year to date. Over the past year, high-yield bonds are up 15.4%.

This report was prepared by Gregory Saliba.

Gregory Saliba

President, Taurus Capital Management

saliba@tauruscap.com

(503) 756-2972

  • 20+ years in Corporate Finance, Debt Capital Markets and Investment Management

  • 2010 Oregon Ethics in Business Award Recipient

  • Public Speaker on Risk, Behavioral Finance and Ethics

  • Finance Faculty Member (12+ years)

  • Willamette University, Atkinson Graduate School of Management

  • Portland State University, School of Business Administration

  • Extensive Community Involvement


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