IMG Q3 2021 Investor Letter

Rising inflation and rate hike concerns may have made headlines several times in the first half of 2021, but investors pushed past the speculation and the equity markets posted record highs. At the midway point of the year the three major US indexes were up by double-digit percentages – the Nasdaq was up 12.5%, the Dow Jones Industrial Average added 12.7%, and the S&P 500 surged to 14.4% since Dec. 31, 2020.1 Optimism for economic recovery was strong amid increased vaccinations, reopening of businesses, and consumer spending on the rise. The Federal Reserve also came out with an optimistic assessment of the economic recovery estimating growth to hit 7% this year, which would be the fastest calendar year expansion since 1984.
Enclosed our team shares insights on the developments over the second quarter and more broadly the first half of 2021 in the markets and economy. For additional in-depth analysis and to view recordings of our team on various local and national media outlets, visit our website RocklandTrust.com/Wealth&Investments.

The US economy began to fully reopen during the 2nd quarter as nearly half of the US population is now fully vaccinated. Many economists are predicting that Q2 real GDP will rise above the levels they were expecting before the pandemic. The Conference Board, a leading provider of economic indicators, predicts that US Real GDP grew 9.0% annualized in Q2 2021 and, will grow 6.6% for the full year 2021. This follows a strong 6.4% annualized increase in Q1.

The Consumer Confidence Index, a survey that reflects consumer attitudes and buying intentions, further improved in June and now stands at the highest level since the onset of the pandemic’s first surge in March of 2020. This is in spite of increased inflation expectations. The survey showed a healthy appetite for long-lasting manufactured goods, such as motor vehicles and appliances. In addition, consumers are showing a continued willingness to purchase homes which could push home prices even higher as demand continues to outpace supply. Consumers have also indicated strong desires to go on vacation over the next six months which should boost demand for in-person services.

Consumer spending, which accounts for two-thirds of economic output, may be underpinned by a strengthening labor market and an elevated personal savings rate that was derived from three rounds of fiscal stimulus checks disbursed over the past year. Furthermore, in July the government will launch a new wave of monthly child tax credit advances to families with children which should strengthen spending into the back half of this year.

Business investment is also helping to sustain the economic recovery as companies continue to pour money into productivity-enhancing digital technology such as computers, machinery, and software. The pandemic forced companies to minimize contact and interact with consumers in ways they hadn’t planned for many years to come. Many past recessions had financial causes which forced businesses to take time to rebuild their balance sheets. However, this pandemic was different in that the government stepped in meaningfully and left businesses ready and willing to spend once they felt it was safe to do so.

Lastly, government spending could continue to help boost economic growth if progress is made on an infrastructure bill. The current $1.2 trillion Bipartisan Infrastructure Framework could result in significant investments in our transportation, water, cybersecurity, and the national electric grid, over the next decade.

Despite this optimistic spending outlook for the back half of the year, investors will continue to weigh whether the recent acceleration in inflation will prove to be transitory in nature or whether it is the start of a long-term trend that could force the Federal Reserve to raise rates faster than anticipated. A sharp and unexpected rise in inflation and rates, increases the cost of doing business, which could lead to lower corporate profits and thus lower economic growth.