In stark contrast to the second quarter of 2020, the economic and market story of Q2 2021 was one of recovery and momentum. As COVID-19 vaccines rolled out in the West and cases fell in many countries including the U.S., equities around the world posted gains, consumer spending boomed, and corporate profits remained strong. Although the surge of reopening demand for goods and services has put pressure on global supply chains and labor markets, fueling an uptick in inflation, and the slow and uneven distribution of vaccines around the world have precluded the true end of the pandemic, the global economy appears to be on the mend.
Stock Markets: Growth Around the World, Big Tech Leads
Major U.S. indices continued their upward run and reached new heights. The S&P 500 (+7.6% Q2), Dow Jones Industrial Average (+4.6%), and Nasdaq Composite Index (+9.5%) all routinely hit new records during the quarter1. One big driver of these gains were increases in Q1 corporate profits (announced during Q2) and expected increase in profits moving forward, especially from the “Big Five” tech giants: Apple, Alphabet (parent company of Google), Microsoft, Amazon, and Facebook. According to the Bureau of Economic Analysis, overall corporate profits were up 2.4% in Q1 20212. The Big Five, however, saw cumulative Q1 revenue increase by 30.6% to $338 billion and profits rise by 66% to $78.2 billion, led by Amazon with a 219.8% increase in net income3. The Big Five’s earnings reports included some fascinating revelations, for example that YouTube, which makes up just 13% of Google’s advertising revenue, is on track to bring in as much revenue in 2021 as Netflix4.
The stock prices of all Big Five companies posted double-digit gains for the quarter (see Graph, above), helping drive the tech-heavy Nasdaq’s performance higher than broader indices like the S&P 500 and further increasing the relative market capitalization of the Big Five firms. For perspective, consider ITOT (+7.8% in Q2), an ETF that aims to track the entire U.S. stock market, which has exposure to 3,634 publicly traded U.S. firms. The five aforementioned tech firms (representing 0.14% of the total number of U.S. public companies) currently have a weighted market capitalization within ITOT of 18.4%5. The weighted capitalization is also apparent within the Nasdaq index. QQQ, an ETF that aims to track the 100 biggest companies listed on the Nasdaq exchange, has a cumulative Big Five weighting of 41.6%6. The increasing concentration of the U.S. equity market toward big tech companies is something investors should consider monitoring, as such concentration (and in turn, decreased diversification) presents possible “too many eggs in one basket” situations for portfolios.
Equities in developed non-U.S. economies mostly fared well, in particular in Europe as vaccination efforts increased and COVID-19 infections abated. Overall, the MSCI EAFE Index (per performance of the ETF IEFA) was up 3.9% in Q2 and the FTSE 100, an index that tracks the 100 largest companies on the London Stock exchange, was up 4.8%7. One exception was Japan, where shares generally underperformed relative to other developed markets and economic data showed continued contraction of the economy. The Nikkei 225, an index that aims to track the largest companies on the Tokyo Stock Exchange, posted a loss of 2.4% for the quarter. In June, the Japanese government released revised data showing a 3.4% annualized contraction in GDP in Q1, although this was better than initial estimates of a 5.1% drop, and a forecast of continued but less severe contraction in the second quarter8. Even though COVID-19 cases remained relatively low throughout the pandemic, steady increases in cases during Q2 led to the Japanese government maintaining a state of emergency until late June, likely hampering economic recovery efforts. The reimposition of the state of emergency and subsequent banning of fans at all events during the recent Tokyo Summer Olympics due to the state of the pandemic was a blow to the economic recovery efforts as ticket and tourism revenue were effectively nonexistent9.
In emerging market economies, markets posted similar gains. The MSCI Emerging Markets Investable Market Index (per performance of the ETF IEFA), was up 4.1% in Q2. Emerging market news that grabbed big headlines during Q2 came from China, where a government crackdown on firms that list shares overseas resulted in an investigation into Didi, a Chinese ride-hailing app, and an order to remove the company’s app from Chinese app stores less than a week after being listed on the New York Stock Exchange10. The crackdown is expected to lessen Chinese companies’ appetite for going public and raising capital outside of China, reducing the number of exposure opportunities foreign investors have to Chinese companies.
Businesses Cope with High Demand and Supply Shortages
Consumer spending in the U.S. increased in Q2 as the public health situation improved and businesses began to fully reopen, surpassing pre-pandemic highs of $14.9 billion/month in March. Data from May 2021 indicated that spending on services, which includes travel, recreation and eating at restaurants, is up 17% from a year earlier and up 24% from its mid-pandemic low in April 2020, although that level is slightly lower (~1%) than pre-pandemic11. This shift in consumer behavior towards activities not allowed during lockdowns has converged with a complex set of labor and materials shortages that have led to price increases. Airline companies are dealing with a shortage of key staff, including pilots, thought to be connected to furloughs (such as a limited supply of training simulators needed to get furloughed pilots sufficient training time to be reactivated) and early retirements during the depths of the pandemic. Combined with an unexpected quick rebound in demand for travel, consumers can expect fewer flight choices and higher ticket prices in the coming months12.
Restaurants around the country are facing similar problems, as a severe labor shortage and complications securing supplies such as chicken wings13 and ketchup packets are forcing eateries to leave tables open (even after the lifting of capacity limits), cut operating hours, and raise prices14. In order to attract employees, restaurant owners have increased wages and added perks such as tuition assistance and free food, but during the pandemic former restaurant employees transitioned to other careers and vacancies in other sectors such as health care, professional services, and retail mean that competition for workers is stiff. According to June data from the National Restaurant Association, there are still ~1.2 million open jobs in the hospitality sector alone15.
Shortages and price increases are not limited to services, however, as goods spending is up markedly (+19.7% over pre-pandemic levels as of May 2021) and supply chain strains have led to limited supplies and delivery delays on items such as furniture, sporting goods food items including cheese and seafood. Arguably the most notable industry affected is automobile production, where a shortage in semiconductor chips has restricted building of new vehicles, causing delays and price increases on both new and used cars as supplies thin. Used car prices in June were up 10.5% compared to May16.
Inflation Moves Higher, Fed Sees More Work on Employment
Overall, prices increased substantially during Q2. Annual inflation, as measured by changes in the Consumer Price Index, was at 5.4% for the 12 month period ending June 2021, clearly above the Federal Reserve’s target of maintaining a long-term inflation rate of 2%17. The expectation from the Fed is that as the economy gets back to normal and supply chain and labor market troubles lighten, inflation will revert to target levels. It is also important to note that inflation was largely muted during most of the pandemic, dipping to a rate as low as 0.1% in May 2020. Despite rising inflation, the U.S. central bank noted in recent comments to the House Financial Services Committee that its low-interest rate and bond-buying policies need to stay in place until more progress is made on revitalizing the economy, in particular in the labor market. The economy added just under 1.7 million jobs during Q2, including 850,000 jobs in June, but the unemployment rate was little changed and currently sits at 5.9%, down from 6.0% at end of Q1 2021, but up from its pre-pandemic level of 3.5%18.
Looking Forward: The Recovery Continues
While the second quarter of 2021 gave us some news to celebrate as some countries started to emerge from the health and economic crisis of 2020, there remains a long way to go in the U.S. and many countries around the world. At SigFig, we encourage long-term investors to keep up to date on the happenings of the global economy and long-term trends, but discourage making investment decisions based on short-term news and headlines. If you have questions about your investment options or what asset allocation is appropriate for you based on your goals, take our risk questionnaire. SigFig has financial advisors ready to discuss your unique situation and offers broadly-diversified managed portfolios that can help you on your financial journey. If you are interested in speaking with a SigFig financial advisor, schedule an appointment today, or become a SigFig managed account customer directly via our website.
1 Data provided by Yahoo! Finance.
2 See Corporate Profits data, Bureau of Economic Analysis.
3 “These 5 Tech Giants Saw Their Profits Skyrocket In Q1 2021; Amazon Tops.” Forbes Middle East. 13 May 2021.
4 “Tech giants’ earnings showed their absolute dominance.” CNBC Tech. 30 April 2021.
5 See iShares Core S&P Total U.S. Stock Market ETF.
6 See Product Detail, Invesco QQQ.
7 Data provided by Yahoo! Finance.
8 “Japan upgrades Q1 GDP on smaller hit to domestic demand.” Reuters. 7 June 2021.
9 “Olympics will ban spectators after Japan declares state of emergency.” CNBC Sports. 8 July 2021.
10 “Analysis: U.S. IPO market a danger zone for Chinese firms after Beijing crackdown.” Reuters Business. 7 July 2021.
11 “Personal Consumption Expenditures.” Federal Reserve Bank of St. Louis Economic Data.
12 “More people are flying — so why are airlines slashing flights and hiking prices?” NBC News Business. 21 June 2021.
13 “The great American chicken wing shortage is upon us.” Vox. 7 May 2021.
14 “California restaurants are facing a new crisis amid worker shortage.” KTLA5 News. 22 June 2021.
15 “Total restaurant industry jobs.” National Restaurant Association Research & Trends.
16 “Why is Inflation Rising Right Now?” Forbes Advisor. 13 July 2021.
17 “Current US Inflation Rates: 2000-2021.” US Inflation Calculator.
18 “The Employment Situation — June 2021.” U.S. Bureau of Labor Statistics. 2 July 2021.
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