2nd Quarter 2021 Market Commentary and Outlook

July 23, 2021

In May, Kevin Goulding, CFP® joined ZRC as a Wealth Advisor based in our Santa Rosa office (which has moved to 3562 Round Barn Circle). Kevin is a veteran finance executive with more than 35 years’ experience in corporate and personal finance. He finds tremendous satisfaction in helping clients achieve their financial goals based on the intimate knowledge of their needs. To read more about what Kevin brings to the ZRC Wealth team, click here. We are happy to welcome Kevin’s many clients that join the ZRC family. It’s an honor to serve you and we look forward to many years of working together.

Quarterly Perspective: Financial Market Review and Index Returns

Key Take-Aways

  • Major economies come roaring back. Effective vaccines, record government support and pent-up consumer demand are fueling a historic turnaround for the global economy. The surprising pace of growth caused the International Monetary Fund to more than double its 2021 U.S. GDP estimate to 6.4%, from 3.1% six months ago.
  • Concerns about inflation and rate hikes seem exaggerated. Consensus among the economists we follow is that inflation will spike in the coming months as stimulus-induced demand meets COVID-restricted supply. But as stimulus wanes and the economy fully reopens, inflation should return to around 2% annualized. Interest rate hikes seem likely by 2023.
  • Value stocks get a booster shot. “Vaccine day” on November 9, 2020, marked a turning point for cyclically sensitive stocks in the financial, energy and travel sectors. Those companies that used the crisis to innovate and improve operations should be well-positioned as the economy reopens.
  • Dividends make a comeback, in the U.S. and abroad. As of May 31, 2021, 76 of the 242 U.S. companies that cut dividends in 2020 have already reinstated them, according to Wolfe Research. And if you think the highest dividends are in the U.S., think again. The number of international companies with greater than 3% yield is more than double those in the U.S.*

During the second quarter, global stock markets continued to post positive performance and build on the previous quarter. Through the first half of the year, 2021 is the 18th best start for U.S. stocks since 1926. Major global market indices ended the period modestly higher with several indices continuing to reach new record highs. During the quarter, all eyes were on the Federal Reserve as investors hung on each of Chairman Jerome Powell’s carefully chosen words looking for insight into future interest rate movements and how that might affect near- and long-term inflation expectations. The uncertainty surrounding this was not enough to keep most markets from progressing upward.

So far, 2021 is turning out to be a reversal of some of the major trends we saw in 2020. In other words, some of the hardest hit segments in 2020 re-emerged in 2021. Small value stocks (often considered one of the most economical sensitive areas of the market) as represented by the Russell 2000 Value Index are up nearly 27% through June, whereas they were up just 4.5% in 2020.

U.S. stocks (as measured by the Russell 3000 Index) gained 8.2%, and non-U.S. developed market stocks (as measured by the MSCI World Ex U.S.) gained 5.5%. Emerging market stocks (as measured by the MSCI Emerging Markets Index) gained 5.0%.

The U.S. Dollar Index, a measure of the value of the U.S. dollar relative to a basket of foreign currencies, increased during the quarter. Specifically, the U.S. dollar increased by 2.8% compared to foreign currencies. Over the past 12 months, the U.S. dollar depreciated by 5.1%. The decrease in the dollar is a tailwind to non-U.S. investments held by U.S. investors for the last 12 months.

U.S. interest rates remained unchanged during the quarter as the Fed continues to maintain a target range of 0.0% to 0.25% for the Fed Funds rate. For more on our take on the 2nd Quarter click here.


Simply put, inflation is the rising costs of goods and services. If inflation averages 3% a year for twenty years (as it did for much of the 20th century) then something (a gallon a milk, a 2×4, your dry cleaning) has nearly doubled in cost. Lately, if you were trying to buy lumber or a used car, you probably felt the effects of inflation a lot. According to the Bureau of Labor Statistics, over the last 12 months, inflation (or, more specifically, the Consumer Price Index aka “CPI”) rose 5% . . . a large amount when taken at face value. Indeed, a reawakening of the U.S. economy — boosted by pent-up demand and unprecedented government stimulus — has stoked investor fears of higher inflation. However, if we expand our lens from 12 months to 24 months to include a period where there was essentially no inflation, annualized inflation over the last two years was just over 2.5% (well within the expected long-term annual range). Furthermore, according to the economists we follow at ZRC, fears of persistently high inflation are probably overblown. As an aside, several economists and researchers we follow, prefer to use data from the Bureau of Economic Analysis and use their Personal Consumption Expenditures Price Index (PCE) to measure inflation. For the period ending May 2021, PCE measured inflation as rising 3.9% from a year earlier. Data through June will be released on July 30th.

Another reason we may be feeling the effects of inflation so profoundly is that with interest rates close to zero, a 10-Year U.S. Treasury bond yielding 1.6%, and a 3-month CD yielding just 0.1%, real returns (the income from a bond or savings account minus inflation) is negative (meaning your most conservative investments aren’t even keeping up with inflation. In fact, this is the largest spread between interest rates and inflation since 1980. While this is very concerning, again, we believe this is only temporary. Additionally, low interest rates and record amounts of stimulus have been very good for your stock investments . . . which have appreciated considerably over the last two years.

Despite higher prices for some raw materials and consumer products, signs of broader price inflation appear to be mostly short term in nature and unlikely to produce sustained, long-term inflationary pressures. “Inflation should spike in coming months as stimulus-induced demand meets COVID-restricted supply,” Capital Group economist Darrell Spence explains. “This is the process of the U.S. economy trying to find a new equilibrium. As stimulus wanes and the economy fully reopens, inflation should return to pre-pandemic levels of around 2% annualized.”

How does ZRC Wealth “hedge” inflation? Gold bullion? Nope. Beef bouillon? Nope. Inflation Protected Securities? Sometimes.

Long have investors sought to hedge inflation with a variety of assets and investments such as gold and precious metals, commodities, REITs, energy stocks, and countless other strategies. Consistent with our belief and research done by Dimensional Fund Advisors and others, such assets, investments, and strategies have historically been mediocre hedges at best and, worse, much more volatile than inflation itself.

For investors who are highly sensitive to inflation and seek to hedge against it, inflation-indexed securities such as TIPS are the most effective instruments for investors. However, even they come with a cost – that is low expected returns vis-a-vis other types of bonds for foregoing the inflation risk premium (the compensation demanded by nominal asset holders for bearing unexpected inflation) and the growth potential offered by assets like equities. The right mix of assets for growth and hedging purposes ultimately depends on an investor’s goals and needs. The good news is that most of the global assets we invest in have been able to outpace U.S. inflation over the long term. As evident by the graph below, simply staying invested is often the most effective long-term solution to inflation concerns.

If you have Long-Term Care Insurance contact ZRC Wealth to review it

Long-Term Care Insurance premiums are increasing at a rapid pace due to people living longer, increased cost of care, poor financial projections, and low interest rates. Many of the policies experiencing rate increases were sold in the 1990s and early 2000s, and insurance companies assumed that 4% of policyholders would allow their policies to lapse. However, as policyholders grew older, they saw the importance of long-term care insurance coverage, and only 1% dropped their coverage. As a result, insurance companies had more people claiming benefits than they projected.

Clients have received letters from insurance providers such as Genworth Life Insurance Companies announcing rate increases of 35% or more and changes to their policies and options. If you own a long-term care insurance policy or would like to discuss whether you need one, please contact us to schedule an insurance review or long-term care needs analysis. As you know, ZRC Wealth does not sell insurance. Even still, we are very knowledgeable about it and have a network of insurance professionals we regularly consult with.

The Santa Rosa office has moved down the street

Our Santa Rosa office has moved ½ mile down the street to 3562 Round Circle, Suite 300 (on the 3rd Floor). Please update your records. It is a beautiful space with large conferences rooms that overlook the Russian River Valley.

As always, we are grateful for the opportunity to serve you and now provide a new, engaging online experience. If the “Current Probability of Success” of your financial plan happens to read “N/A,” then it has been too long since we have reviewed it together. Please let us know a convenient time for us to meet.


*Sources: Capital Group, Dimensional Fund Advisors, Morningstar Inc., Buckingham Strategic Partners, Blackrock, Inc., and American Century Propriety Holdings, Inc.

All investing is subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future returns. Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.