The first half of 2021 witnessed a reopening of global economies as vaccines were distributed and COVID-19 cases and deaths declined. The Federal Reserve has been very accommodative, and risk assets have responded favorably with the S&P 500 up 17% YTD. We believe the global economy will continue to recover but may soon plateau in more developed areas of the world. Consumer spending has rebounded as people start to travel and spend excess cash saved during the pandemic. Labor markets are improving and should continue to provide a tailwind as the year progresses.
The economic data through the first half of the year has been exceptionally strong as the pandemic shifts and economies begin to normalize. We believe we are mid cycle, and the economic data should begin to level out as the year progresses. While valuations in the equity market remain elevated, they stand in stark contrast to valuations in the bond market as yields continue to remain very low relative to historical levels. Currently, the bond market is much more expensive than the stock market on a relative value basis. Despite this environment, equities remain attractive over the long run, yet we still view bonds as a vital component in portfolios for preserving capital and maintaining stability during times of turbulence. We anticipate the low interest rate environment we have been in to continue as the Federal Reserve maintains its $120 billion per month pace of asset purchases.
While some of the inflation data that has been released has been the highest reported in many years, we see this as a short-term phenomenon resulting from supply chain disruptions and bottlenecks caused by the global pandemic. This effect should prove to be “transitory” as Jerome Powell has stated. We are of the view that the global economy is potentially fighting long-term deflationary pressures which Congress and the Federal Reserve have been working to combat. High inflation can disrupt certain facets of the economy, but deflation is a much worse problem to overcome due to the constraints on tools used by monetary and fiscal agents. In the short-term, if inflation should prove sticky and remain above trend, that could prompt the Federal Reserve to begin pulling back on their asset purchases.
Overall, the markets have delivered strong returns for investors despite all the challenges the world has faced. We expect more near-term volatility as the market digests a potential pivot of monetary policy and the economy normalizes. While there are many positive forces supporting the continued growth of the markets and economy, we continue to monitor the resurgence in COVID cases, the expected slowdown in economic data and rising inflation.
For more information about Covenant Trust’s outlook on the markets or to speak with a local Covenant Trust representative about an investment strategy that is right for you, reach out to us by email or phone at 800-483-2177.
The information provided is general in nature, educational and is not intended as either tax or legal advice. Consult your personal tax and/or legal advisor for specific information. Covenant Trust is incorporated in the State of Illinois and is supervised by the Illinois Department of Financial and Professional Regulation. Covenant Trust accounts are not federally insured by any government agency. Clients may lose principal as a result of investment losses.
 Bloomberg Terminal as of June 17, 2021
 Federal Reserve FOMC Press Conference, June 16, 2021