Quarterly Market Summary:2Q:2021

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Stocks posted an +8.6% gain in the second quarter of 2021.

How good is an +8.6% return in a quarter?

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The stock market since 1926 has averaged little more than a +10% annual return, which would be about +2.5% a quarter.

This table shows the returns in each of the last 26 quarterly periods—six and one-half years.

The green-highlighted boxes indicate all the times in the past 26 quarters that the return on stocks was +2.5% or more.

In 18 of the last 26 quarters, the S&P 500 returned +2.5% or more, which is amazing since this includes a double-digit correction in the fourth quarter of 2018 and the Covid bear market plunge in the first quarter of 2020.

So, yes, an +8.6% quarterly return is very good, but we also want to remember that one quarter of data is not all that meaningful.

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This shows four different views of the quarterly performance of investments that matter most to our clients.

In the upper left, large-company growth stocks led the way among U.S. stocks as measured by the Standard & Poor’s 500 stock index, with a gain of +11.9%.

And the U.S. outperformed the other major stock markets across the world once again in the quarter.

In the lower right, you can see a diversified investor with a broad portfolio of 13 different asset classes. The picture was bright, with none of the 13 asset classes represented here showing a loss.

That is unusual.

But again, there are not many sweeping, grand conclusions to draw from just a single quarter of investment data.

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Let’s switch gears and look at a much longer time period and a more important metric for investors.

Stocks are risky. Everyone knows that. But let’s look at whether they have been worth the risk.

The stock market has been breaking record highs for nearly a year now, and stocks are high-priced by some traditional historical measures, such as trailing 12-month earnings.

With some pundits saying stock market risk is high, this is a good time to note how investors have been compensated for taking the extra risk of investing in stocks instead of parking cash in a so-called “riskless” asset like 90-day Treasury bills.

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Stocks, as measured by the Standard & Poor’s 500 in the 20 years ended June 30th, 2021, averaged an +8.61% annual return, compared to the meager +1.26% annual return on a risk-free 90-day U.S. Treasury bill.

Since the T-bill is backed by the full faith and credit of the U.S. government, it is considered a riskless investment, while the value of stocks is subject to ups and downs and, in theory, your entire investment could be lost in stocks.

Subtracting the return on T-bills from the return on stocks, the resulting +7.35% is the premium paid for taking the risk of owning U.S. stocks over the 20-year period.

To be clear, investing in America’s 500 largest publicly held companies earned investors an average of +7.35% more annually than a risk-free investment.

This 20-year period encompassed three frightening bear markets—the tech stock crash of 2002, the financial crisis of 2008, and the Covid downturn of early 2020.

Past performance is no guarantee of your future results, and that, paradoxically, is precisely why investors are paid a premium for owning stocks.

The point is that, yes, stocks are risky, and that’s why they have had a higher return than guaranteed investments throughout history.

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If you had to describe the 12 months ended June 30, 2021, in one word, it would be “unprecedented.”

Everything about it was a first!

The first pandemic in a century.

The government’s $5.3 trillion in stimulus and direct payments was like nothing ever done before.

The vaccine development and distribution was like no national public health campaign before it.

The unprecedented low interest rates and low inflation rate, and an unprecedented policy by the Federal Reserve to leave rates alone despite signs of sharply higher inflation.

The 12-month gain was also a rare event: a +40.8% return!

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Categorized by market capitalization and characteristics, the best-performing types of U.S. stocks in the 12 months ended June 30, 2021, were small-company value shares, which returned nearly twice as much as the off-the-charts 12-month return on the S&P 500 of +40.8%.

The small- and medium-sized companies were playing catch up, having fallen the most in the pandemic.

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All 11 sectors of the S&P 500 were up in this one-year period ended June 30, 2021.

It was the second consecutive quarter in which all 11 industry sectors showed positive returns.

Despite the unprecedented risks, stocks across all 11 industry sectors delivered returns ranging from outstanding to breathtaking for 12 months.

The 11 S&P 500 industry sectors have averaged about a +10% return annually for decades.

In this most recent 12-month period, the poorest return of the 11 industry sectors was the +15.8% on the utilities stock sector index. That’s 50% more than a normal year!

Financials gained nearly +62% and was the top performing sector.

Was that predictable?

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Keep in mind, only a few quarters back, 10 of the 11 industry sectors had suffered huge losses over the previous 12 months.

This was the Covid quarter.

You may remember that the stock market dropped from an all-time high in early February when the outbreak hit, and the S&P 500 had lost 33.9% of its value as of March 23, 2020.

The quarter ended with tech stocks returning a +10.4% profit, but the rest of the stocks across the other 10 industry sectors all lost value in this snapshot from the 12 months ended with that terrible quarter.

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The 12-month industry sector returns for the past six quarters illustrate how difficult it is to predict which industry sector will outperform.

With stocks breaking all-time highs month after month, greed and fear—two strong emotions—are likely to make appearances on financial cable TV talking heads, newspaper reports, and, perhaps most insidiously, on social network ad campaigns.

Here is important evidence of how unpredictable the last year has been. It can help you stay focused on a strategic investment plan.

The 12-month returns on the 11 industry sectors that comprise the S&P 500—America’s most valuable 500 publicly investable companies—for the previous six quarters tell a story about how unpredictable stock market investing can be.

For example, with a +62% return for the 12 months ended June 30, 2021, financial sector stocks were the No. 1 performer of the 11 S&P 500 industry sector indexes. And that followed a 12-month return last quarter of +67.5%—more than six times the average annual return in a “normal” year in modern history.

But—and this is a big “but”—financial company equities had lost money in four of the 12-month quarterly periods preceding the second quarter of 2021.

Point is, after suffering 12-month losses four consecutive quarters, could anyone have predicted financials would be a consistent No. 1 performer?

If anyone could do that, would they need your money?

Instead of chasing dreams, please consider the strategy we use—modern portfolio theory—as a framework for portfolio management.

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MPT is a large body of financial knowledge based on academic research done over the last 70 years.

This framework for investing is now taught in the world’s best business schools and embraced by institutional investors.

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The world that investments revolve around is always changing, and not enough statistical history exists to make investment predictions with certainty.

MPT is a framework for managing that risk.

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MPT is a quantitative approach to financial, economic, and statistical facts.

MPT adjusts what’s happened in the past in coming up with an investment outlook based on economic fundamentals.

In addition to classifying investments based on their distinct statistical characteristics, MPT imposes a quantitative discipline for managing assets based on history and fundamental facts about finance.

MPT does not guarantee success, but its logic is embraced by pension funds and other institutional investors.

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Over the 12 months, U.S. stocks outperformed major foreign indexes representing stocks in emerging markets, Europe, Asia-Pacific nations, and China.

More about this will follow shortly.

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Remember all those bullish TV ads about gold prices that you saw on TV a year ago?

They were wrong!

Even the growing threat of inflation hasn’t made the precious metal shine.

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After trading sideways for approximately two years in 2015 and most of 2016—and hitting two air pockets—the stock market broke out of that range after the November 2016 election and rose steadily to an all-time peak on September 20, 2018, whereupon it dove by -20% on investors’ fears that an inverted yield curve was imminent.

On January 4, 2019, the Fed signaled rate hikes were on hold, and stocks rallied for most of the remainder of 2019.

In February of 2020, stocks hit a new all-time peak. Then the Covid-19 virus put the economy and the stock market into meltdown.

By early September of 2020, stocks hit a record all-time high following the enactment of the CARES Act and related legislation.

After a pause, stocks rallied steadily from the November 2020 election through year-end.

The S&P 500 continued upward through the first quarter of 2021 with the March enactment of the $1.9 trillion American Rescue Plan Act, and through the second quarter of 2021.

Over the last five years, including dividends, the S&P 500 Total Return index has gained +125%.

To be clear, the stocks in the Standard & Poor’s 500 index have more than doubled in value in the past five years.

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The index representing S&P 500 growth companies, America’s blue-chip stocks, returned $1.68 for every dollar invested for the five years ended June 30, 2021.

The growth index is weighted based on market capitalization, which makes it dominate the performance on the S&P 500 growth stock index.

The five largest growth companies in the S&P 500 accounted for 21% of the total value of the much-watched index at the end of the second quarter of 2021.

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Here, too, the dominance of the five largest companies in five-year industry sector performance.

The technology company stock index nearly tripled in the past five years!

Put another way, If you had invested $1 on May 31, 2016, in the S&P 500, it would have more than doubled in value to $2.25 on June 30, 2021!

Meanwhile, $1 invested in the S&P technology stock index for the same five-year period would have grown to $3.89 on June 30, 2021!

The second-best sector return came from stocks in consumer discretionary companies, but the tech index return was nearly twice as large over the five years.

The 10 other industry sector indexes all trailed technology stocks by wide margins, and the energy index lost 3.9% of its value in this same period!

It begs the question: Are the Big Five tech stocks overvalued?

The answer is no.

To the contrary, they actually may be undervalued.

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Of the 500 companies in the S&P 500, the five largest account for 21% of its total value.

Ranked by market capitalization, the five companies are: Apple, Microsoft, Amazon, Google, and Facebook.

They’re all tech companies.

During the pandemic, when we all stayed home, we all became more reliant on these companies and bought more from these companies.

To be clear, of the 500 companies in the S&P 500, the five largest account for 21% of the total value of the much-watched index.

What’s most surprising is that The Big Five are trading at low PEG ratios relative to the other 495 stocks in the S&P 500 index.

The average company in the S&P 500, as of July 9, traded at a PEG ratio of 3.3%, while the Big Five traded at a PEG ratio of just 0.98%—a large discount to the other 500 companies in the S&P 500.

Wikipedia attributes development of the PEG ratio to Mario Farina in a 1969 book. A PEG ratio is a company’s price/earnings ratio divided by its earnings growth rate for the next year. A PEG ratio adjusts the traditional price/earnings metric for valuing a company’s stock by accounting for its expected earnings growth rate.

Curiously, the Big Five look expensive if measured against the S&P 500’s average P/E ratio of 22.8, but the PEG ratio is a better metric to apply because it reflects their expected earnings growth rates, which are of crucial importance to how share prices for these growth stocks are valued in the market.

To be clear, when you look at the earnings growth expected from Amazon—a +73% expected profit growth rate, versus the +7% growth rate expected on the average company in the S&P 500—Amazon looks cheap!

Amazon's PEG ratio is nine-tenths of 1%, versus the S&P 500's PEG ratio of 3.3.

Amazon’s trading at a lower PEG ratio than the average stock in the S&P 500!

Stocks are risky investments, and they are volatile.

The S&P 500 has suffered one-day declines of more than 2% recently, and 1% to 2% one-day drops are not uncommon.

Uncertainty about the risk of the Covid-19 variant, as well as inflation, is likely to cause big drops in the S&P 500 in the days ahead.

Yet stocks are the growth engine of a retirement portfolio and are key in a comprehensive tax-smart investment plan built to last the rest of your life.

The table entitled “Valuations Of ‘The Big Five’ Versus S&P 500” was derived from a class for financial professionals by Fritz Meyer, an independent financial economist, on Advisors4Advisors on July 13, 2021.

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With volatility high and tax laws about to change, please consider whether the next stock selloff could be a long-term planning opportunity.

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Over the five years ended June 30, 2021, the S&P 500 outperformed China’s risky and government-manipulated stock market index, as well as the emerging markets stock index, and it delivered double the return on the Standard & Poor’s European Broad Market Index.

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Of 13 indexes tracking a diverse set of asset classes shown here, No. 1 by a large margin for the five years ended June 30, 2021, was the U.S. stock market.

The factors that propelled the outstanding five-year outperformance by U.S. stocks, as measured by the S&P 500, are easily overlooked by Americans but worth reminding you about.

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The S&P 500 is the growth engine of portfolios worldwide because the United States is the world’s leading economy, by far.

And it’s not just about having the largest GDP by far; there’s more to it.

The U.S. has the most desirable economic system in the world, by far.

The most valuable public companies in the world are located here, and the U.S. possesses a combination of qualities, including the world’s most:

  • well-developed auditing and accounting systems.
  • stable government and regulatory structure.
  • liquid markets for securities.
  • transparent free markets.
  • favorable demographics of the major economic powers.

These are facts that investors easily overlook, but they are important fundamentals of returns for U.S. investors.

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To be clear, this is a diverse group of indexes of securities, and the index representing America’s largest publicly traded companies, the index that is the growth engine of diversified portfolios of investors worldwide, U.S. stocks, returned 125.4% in the five years ended June 30, 2021!

By a huge margin, U.S. stocks were the No. 1 performing of this diverse group of 13 types of securities indexes for this five-year period.

A distant runner up was the 74.9% return on a global index of stocks excluding the U.S.

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Remarkably, U.S. stocks were not just No. 1 for the five years ended June 30, 2021, but they were the No. 1 performer for the past five five-year periods ended June 30, 2020, 2019, 2018, and 2017!

Every year for the past five years, the U.S. has led the world’s stock markets for the previous five years.

The S&P 500 has been the No.1 five-year investment among 13 different types consistently for five years.

That’s extraordinary!

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This is precisely the right time to plan for your worst financial nightmare happening.

The stock market has treated American stock investors well year after year, and it could continue.

I’d be lying if I did not say it is possible that the next five years could be as good as the past five great years for stocks.

But I’d also be lying if I did not say that the next five years could be bad for U.S. stocks or that your personal financial situation won’t be subject to drastic change in your business, industry, or Gd-forbid, your health.

Coming out of the first pandemic in a century, the future feels more uncertain than ever, and past performance is no indication of your future investment results.

At the same time, the persistent leadership of U.S. stocks is an important trend driven by financial economic conditions.

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With the stock market strong, housing values high, interest rates low, the Fed extremely accommodative and everything going pretty-well, this is the perfect time to plan for your worst nightmare.

Your worst nightmare may be running out of money when you’re aged and no long will want to work, or maybe you stay awake at night worrying about who will care for a child with special needs after you are gone.

But fear comes differently to each of us, depending on how we’re conditioned and hard wired – brain chemistry.

Everyone reacts to stress differently and everyone has their own financial stress triggers.

Some people are prone to panicking in times of high risk.

When Covid hit, when the stock market plunged 33.9% in the six weeks from February 5, 2020, to March 23rd 2020, in those six scary weeks, the price of stocks plunged because some investors panicked.

If you were among those who sold at the bottom and missed the sudden turnaround after those frightening six weeks, or even if you were considering selling everything in stocks during the crisis, there are steps you can take to avoid panicking or worrying about whether you should sell in times of crisis.

For other people, their fear is not panicking in a crisis, it’s a personal fear like losing your job, caring for a special needs child after your death, or paying down a business debt.

Whatever your worst nightmare, this is a good time to articulate it and make a plan for it.

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Quarterly Market Summary:4Q:2023
Quarterly Market Summary:3Q:2023
Quarterly Market Summary:2Q:2023
Quarterly Market Summary:1Q:2023
Quarterly Market Summary:4Q:2022

This article was written by a professional financial journalist for Rosenfelt, Siegel & Goldberg, The Investment Center and is not intended as legal or investment advice.
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