The second quarter of 2021 was anything but typical. The S&P 500 had a terrific quarter, up 8.17%. These great returns were on the shoulders of a strong first quarter. The S&P 500 is now up 15.25% for the year. This return was found in the face of fears of COVID variants spreading, fears of inflation, the likelihood of a worldwide corporate tax, and the possibility of having state and federal tax increases.
Ten of the eleven sectors of the S&P 500 provided investors a positive return for the quarter, with utilities as the only sector to lose value during the quarter. The top three performing sectors for the quarter were Real Estate, Information Technology, and Energy, up 13.1%, 11.6%, and 11.3% respectively.
Polaris Wealth continues to be concerned with the weighting of the top 10 stocks as they are represented in the S&P 500. Currently, the top 10 companies represent 28.6% of the index’s weighting. This is a level we haven’t seen since the early 1980s. Why is this so important? Right now, the S&P 500’s performance as an index is completely driven based upon these 10 companies. And right now, these ten companies are overvalued. It is very possible that we could see the index correct and still have the majority of the companies in the S&P 500 have positive performance. When you hear us talk of, “We aren’t buying the market, we are buying companies in the market,” this is exactly the point that we are trying to make. These ten companies might drive the index down in value, but it doesn’t mean that we have to see the same downside in our investments.
The four graphs below are illustrative of our current situation. Lumber (top left) dropped to $200 per 1,000 board feet during COVID. It then ran up to almost $1,700 per 1,000 board feet in early May, only to fall to $700 now.
This is a perfect example of how demand outstripped supply due to COVID. During COVID, lumber mills were shut down. As we began to open our economy, our population moved from cities to the suburbs, because people wanted more space, they wanted a yard. This created demand for more houses, pushing the prices for lumber up. It wasn’t until the lumber mills fully opened that they could meet the demand. Once they were able to meet the demand, prices fell back to more normal levels.
The other commodities, Brent oil, poultry, and wheat give you an understanding of where prices have gone over the last year. Brent oil prices have gone up in value as the world’s economies have come back online. More demand, higher prices. Poultry prices are similar to what happened with lumber, tied with economic stimulus. Poultry plants shut down due to COVID. The economic stimulus packages are so rich in the United States that it is hard to motivate workers to go back to work. Even though these plants have reopened, they are working below capacity.
Second Half Outlook
There have only been 14 times that the S&P 500 didn’t experience at least a 5% pullback during the first half of the year. 2021 is now the 15th time that this has happened in the S&P 500’s modern history, only experiencing a 4.2% pullback beginning in February and ending in early March.
We see strong performance in the stock market, especially for areas that are still undervalued or at the very least aren’t trading at record highs. This said, there is still risk in the markets. The most pressing issue that we see is the mutation of COVID-19. We can only hope that those complacent to get their vaccination will do so soon. We need all Americans to treat getting vaccinated as something that they are doing for the greater good of our country and humanity. And we can only hope that the millions of doses that are being manufactured daily are distributed far and wide so mutations of COVID-19 will be limited. We expect the United States and most countries in Europe
to be at herd immunity levels by the end of this year. Russia, Australia, and most of South America should be at those levels by mid-2022, and most Asian countries should be at herd immunity by the end of 2022. Only the poorest countries, with the lowest levels of medical support should be receiving vaccines into 2023. As of July 4th, 3.2 billion doses had been administered worldwide.
Things are starting to look very promising for our economy to fully open and for companies and investors to take advantage of the stimulus programs set before them. We constantly tell you that, “Bull markets climb a wall of worry.” That is what is going on currently.
Markets can be fickle. If we were to see a shift in sentiment, Polaris Wealth would do what we do best, and that is to tactically manage the risk in the markets. We are vigilantly evaluating the markets to take advantage of current trends, and we are always keeping an eye out for things that would reverse the markets’ upward trend. Given what we know at the moment, things look good for the market.