U.S. stocks continued to rally during the second quarter with the S&P 500 Index returning 8.55% and ending the quarter at an all-time high. The equity markets benefited from strong economic growth, low interest rates, increasing company profits and substantial progress on the vaccine front in the developed markets.
In a reversal of the trend last quarter, the equity markets rotated back to favoring growth over value stocks. The Russell 1000 Growth Index returned 11.9%, while the Russell 1000 Value Index returned 5.2% during the quarter.
Another trend reversal occurred with large caps outperforming small caps during the quarter. However, small cap stocks performed so well during the first quarter that they are still outperforming large caps on a year-to-date basis.
All S&P 500 sectors were in positive territory during the quarter with the exception of utilities, with real estate and technology leading the way returning 13.1% and 11.6%, respectively.
Non U.S. equity markets also posted positive returns during the quarter with developed markets (as measured by the MSCI All Country World Index ex US) leading emerging markets (as measured by the MSCI Emerging Markets Index). Conditions in Europe continued to improve as many pandemic-related restrictions were lifted.
The U.S. Treasury yield curve flattened slightly during the quarter as longer-term rates continued to fall. All major fixed income sectors experienced positive returns during the quarter as bond yields fell by over 25 bps. The 10-year Treasury fell from 1.74% to 1.45% during the quarter, resulting in a positive return of the Barclays US Aggregate Bond Index of 1.83%.
U.S. economic growth in the second quarter of 2021 was supported by accommodative fiscal and monetary policies, pent-up consumer demand leading to strong corporate earnings, and a rollback of many of the pandemic-related restrictions. Second quarter GDP expanded at an annual rate of approximately 6.5% based on the first advanced estimate.
The economy added 1.7 million jobs during the quarter, however, despite the latest employment growth, the economy is still approximately 7 million jobs short of pre-COVID levels. Notable job gains occurred in leisure and hospitality, public and private education, professional and business services, and retail trade. The unemployment rate continued to fall and equaled 5.9% in June. Reported job openings have been rising and are approximately equal to the number of unemployed.
Inflation received much attention during the second quarter as headline inflation, measured by the Consumer Price Index (CPI-U), more than doubled to 5.4%, up from 2.6% the previous quarter, the biggest spike in inflation in more than a decade. Many businesses cited increased prices from supply chain disruptions, higher raw materials costs, and shipping constraints. Areas of the economy experiencing pent-up demand saw double digit price increases, such as transportation, energy prices and used vehicles, which were major contributions to the significant jump in inflation figures for the quarter.
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