What a difference we see at the mid-point of 2021 compared to where we were at the beginning of the year when the country was in the grip of the second wave of COVID-19.

The third wave peaked in early April and then things began to improve slowly but surely with the accelerating roll-out of vaccines. After a difficult 16 months of pandemic, health restrictions are easing, the economy is reopening, and family and friends are gathering for summer activities.

While danger still looms from the highly transmissible Delta variant, there is a definite sense the worst is behind us. Nevertheless, we won’t forget the terrible suffering of so many or the devotion, sacrifice and hard work of medical personnel and front-line workers during the pandemic.

COVID continues to ravage many developing countries but, as economic activity in the developed world accelerates, it’s the threat of inflation that is making headlines in the financial media. A spike in inflation to 3.6% in Canada and 5% in the U.S. in May got the attention of economists, some of whom worried a long-term inflation problem is being stoked.

Prices for oil and other commodities rose beyond pre-pandemic levels while pent-up consumer demand and supply chain bottlenecks pushed up the price of cars, lumber, and airline tickets, among other things.

A boom in home prices has spread to secondary cities and cottage country as people, attracted by low interest rates and flush with cash from long months of being locked down, seek out more space in town and recreational properties out of town.

Labour shortages have cropped up in retail, restaurants and other service sectors that suffered the most during the lockdowns. However, the overall employment market has yet to recover all the jobs lost during the pandemic.

The Bank of Canada and U.S. Federal Reserve have said repeatedly the current bout of higher inflation is most likely a temporary phenomenon linked to transitory effects from the reopening of the economy.

Recent action in the bond market seems to support this thesis. Inflation worries sent interest rates higher (and bond prices lower) in February and March. But rates have edged down recently, signalling moderating concerns about the threat of a long-term surge in inflation, although it’s something to keep an eye on.

Here’s an overview of how the major asset classes performed in the first six months of 20211:

  • The increase in interest rates back to pre-pandemic levels earlier this year led to a -3.5% return for the Canadian bond universe in the first half. However, the short-term bond universe in Canada performed better, returning -0.4%.
  • Real estate investment trusts were star performers during the first six months of the year. Commercial and office REITs did particularly well as shopping malls reopened and many companies laid out plans for employees to return to the office. REITs returned 21.1% in Canada and 15% globally in the first half. By contrast, Canadian utilities were up only 3%, after a strong return in 2020. Higher expectations for inflation and interest rates tend to put a damper on utility returns.
  • Canadian equities rallied to return 17.3% for the first half, with value stocks providing a healthy premium and small-cap stocks performing in line with the market.
  • U.S. stocks returned 12% for the broad market in Canadian dollar terms, with both value and small-cap equities providing premiums over and above the broad market return.
  • International developed equity returned 5.8% and emerging markets returned 4.4%, with positive small cap and value premiums for both, as well.
  • Finally, the Canadian dollar gained value against most other global currencies. A strong economic recovery and robust commodity prices helped push the loonie closer to purchasing power parity, a very long-term measure of fair value, with the U.S. dollar.

As a result, PWL portfolios performed between 3% and 12% for the six months to June 30, depending on the risk level of your portfolio. The value and small-cap tilts provided a 2% to 4% premium2 over the market return based on the equity weight in the portfolio.

With such strong stock market performance over the last 12 months, it wouldn’t be surprising to see a pullback at some point, though we know we can’t predict when. We took some profit in March and April for all portfolios on U.S. and emerging market stocks to buy back some bonds at now higher yields.

We hope you can enjoy the summer months with your family and friends. As always, if you have any questions or concerns, please don’t hesitate to contact us.

Best regards,

Peter Guay


1 Source: Morningstar Direct
2 Source: PWL Capital