Q2 2021 Investment Perspectives

July 15, 2021

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The summary below has been created by a professional transcription vendor upon review of the recorded presentation. Please excuse any typos as well as portions noted to be inaudible.

Hello everyone. I’m George Padula, Chief Investment Officer, Modera Wealth Management. I want to thank you for joining me today for our second quarter investment perspectives. I’m going to dive right into some index returns.

We’re going to then talk about inflation and interest rate changes, and then provide some longer-term perspectives as well. So here, what you see on this slide is that for the second quarter, best returning asset class was real estate up 10 and a half percent large cap S and P 500 up about 8.6%. You know, it’s been interesting to see us equities doing so well with, even with inflation concerns. And even as some uncertainty with regards to the fed stimulus efforts, we look over the last year, you can see S and P a S and P 500 doing about 41%, uh, small cap up 62%. Uh, international developed stocks did well this quarter over the last one year, uh, three years, five years emerging markets have done particularly well, you know, fixed income, uh, corporate bonds have been doing well.

Municipal bonds have been doing well. We saw interest rates go up in the first quarter. So the aggregate bond index size a little bit negative, but again, it’s why you want to be diversified, not only in us and, uh, equities and international equities real estate, but also within your fixed income. Uh, we starting to see economic, uh, improvements.

We’re starting to see businesses doing well. Reopenings vaccinations are doing, you know, causing this and helping us out. You know, we’re seeing inflation spike a little bit, but this is also pretty typical after an economic slowdown. And even though inflation has been making good headlines, you know, the markets still seems to believe that they should be under control earnings have been rebounding.

We’re looking at earnings growth, projected to be much faster than the last two, uh, prior economic downturns and the earnings decline in 2020 was actually a lot less than in 2001 in 2008.

And it’s interesting too, when we look at earnings declines, there was actually a mini earnings recession in 2015, businesses are, really scaling up, uh, quickly, but yet they’re finding it hard to get employees. Job openings are spiking up. Uh, the ability to, uh, fill those jobs has been very difficult, you know, causing some wage pressures on the upside.

This slide here is the chart from the federal reserve bank of St. Louis, uh, showing the consumer price index, uh, both in the that’s the blue line. And then if you strip out, uh, food and energy, which are a little bit more volatile, that’s the red line you can see over in the far right. That’s where we are today. So right now we’re looking at inflation, you know, running it about a 4.9% annualized rate. Uh, over the last 50 years, the average has been about 3.8%.

But what you notice is that in the gray areas, those recessions 2008, 2001, uh, in the early nineties, you know, those recessions, you see big downturns in, in, uh, inflation and in the recessions, and then these spikes upward with inflation, right? So you’re getting that spike up after the downturn, even sometimes even during the downturn, right? So we’re not seeing that inflation today, any higher than it has been in other periods of time. And I think that’s important to remember as you look at and at the headlines, if we do see inflation, what’s that going to mean for interest rates?

Well, on this chart, the yield curve, the lowest line there, the purple line is where interest rates were in August of 2020. The blue line is where interest rates were, are now. And the gray line that is where interest rates were in 20 13, 8 years ago. So if you look in the, kind of the middle there, the 10 year bond was at about 3%, uh, interest rate in 2013, we’re at about 1.4% now. And it was about 0.5% last year. So interest rates have come up. And in fact, the fed, the federal reserve bank has said they are going to be raising interest rates, uh, at some point in the future. So we should see those rates going up. We’re a long way away from where we were even eight years ago. And so I think that’s important to remember that these long, you know, interest rates really came down a lot, a lot of liquidity. And I think there’s going to be a fair amount of time before they get back up to where they were before. Let’s think about the longer-term perspective here. So with interest rates moving up, perhaps inflation, economic rebounds, what does that mean? Where should you be investing?

Well, I looked at the last 20 years and broke it up into four or five year segments to really kind of hone in on different time periods, uh, in different economic cycles. So the first in the upper left, the 2001, 2006 time period led by emerging markets led by real estate, you know, up in the 20% range annually. When you look at the S and P 500 up about two and a half percent, bonds were giving you a about 5%. Now that’s right after the tech bubble, the next five years kind of encompassing the financial crisis, you know, emerging market bonds, again up almost 12% now in emerging market equities, I’m sorry, up about 12% bonds giving you up about six S&P 500 was only giving you about 3%, 2.9 that’s for five years. Annualized. Now we’re coming out of that, that rebound out of 2008, what led the way real estate up 12 and a half percent S&P 500 finally getting its traction up annualized at 12%. Now we look at the most recent five years led by growth. You know, interest rates really came down. You had a lot of liquidity growth viewed extremely well over the last five years, uh, S and P 500 done well. Small caps have done well, but certainly, you know, this has really been the last five years about growth in large cap.

So let’s look at the last, you know, 10 years and 10 years before that in 20 years, I mean, it really has been a tale of two, uh, two markets first 10 years, , in 2001 to 2011, Emerging markets of 16 and a half percent us stocks S and P 500 up barely three at the end. And, not even that really a 2.7% bonds gave you about 5.7. Then we flipped, right bonds giving you about two to 3%. You know, that’s pretty steady real estate giving you another 10%, but yet the growth 17 and a half percent emerging markets about five. And we’ve put those two together last 20 years. Think about this 20 years, 2001 to 2021 best performing index asset class, real estate, up 10 and a half percent.

What’s that followed by? Well, it’s followed by emerging markets. Then you get into growth. Then you get into, uh, small caps. Then you get into the S and P 500. The point being in all of this is we’re going to see inflation. We’re going to see slowdowns in the economy. We’re going to see spikes in the economy. We’re going to see interest rates, move up, interest rates, move down, whatever it is you have to keep that long-term perspective. You have to stay diversified. It’s not about picking and choosing the one asset class it’s having the totality of your portfolio working for you. Well, I thank you for listening. Any questions, please reach out to your wealth manager. I’m certainly here and available to help as well. Thank you.