So Far, A Strong Expansion

June became another month of small gains for investors, as domestic stocks and bonds were positive.
As the month ended, U.S. large-cap stocks were up a bit over 2%, propelling the S&P 500 to a new all-time
high. U.S. small-cap stocks and REITs also increased modestly, and the overall U.S. bond market
increased by 0.8%.

Speaking of the bond market, the current interest rate environment is an expression of competing
forces. The Federal Reserve came out with new guidance indicating that it would raise interest rates
twice by 2023. Normally, that would send long-term interest rates higher in anticipation of future
increases. In this case, it did not. The Fed also announced that they would end certain kinds of bond
purchasing. Currently, the Fed is buying $80 billion per month in Treasury securities as well as $40
billion per month in mortgage-backed securities. The Fed indicated they will end these purchases prior
to any rate hike. Counterintuitively, long-term interest rates fell. It is possible the market was
anticipating even more interest rate increases than the Fed announced, which could be reason that longterm
interest rates came down. More time will have to pass before this becomes clear.

As mentioned in last month’s client letter, the economy continues to improve. Initial jobless claims had
hit a new pandemic low, home prices continued to reach new highs, and retail sales remained strong.
This theme continued in June, as the Fed reiterated that they saw gross domestic product (GDP)
expand at a real rate of 7% this year, which would be the strongest expansion since the early 1980s. As
a bit of supporting evidence, last month’s retail sales figures were 18% higher than their pre-pandemic
levels. While we will not have second quarter GDP data until the end of July, some forecasts have put
the annualized number as high as 10%.

As we close out the first half of the year, we find ourselves in a place similar to where we were in the
beginning of the year: a strong stock market, a recovering economy, and historically low interest rates.
We will be watching each element quite closely as we move from recovery to normalization.
As California’s reopening continues and more people are becoming fully vaccinated, our team and our
clients are beginning to enjoy a greater sense of freedom. While caution is still being exercised, this is a
welcome respite from the past year. We hope you are enjoying the summer. Please feel free to reach
out if we can be of service.

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