deliveries. Services, the largest sector of the U.S. economy, which had been especially hard hit by the COVID-19 pandemic, also began to recover during the semi-annual period, as more people became more comfortable going to restaurants, movies and retail stores. The ISM Services Index registered 57.2 at the end of 2020 and reached a historic peak of 64.0 in May 2021 before slipping to 60.1 in June.
Perhaps the major concern for the economy during the semi-annual period was a significant increase in inflationary pressures, a consequence of the strong economic recovery. The core Consumer Price Index, which excludes food and energy, rose 1.6% on a year over year basis in December 2020 but then reached an annualized growth rate of 4.5% in June 2021, the largest 12-month increase since the period ending November 1991. The energy index rose 24.5% over the 12 months ending June 2021, and the food index increased 2.4%. Over the 12 months ending June 2021, the broader all items Consumer Price Index increased 5.4%, the largest 12-month increase since a 5.4% increase for the period ending August 2008.
U.S. Treasury yields rose, and some economists criticized the U.S. Federal Reserve (the Fed) for maintaining monetary policy accommodation rather than increasing its near-zero short-term interest rates in an effort to counteract increasing inflation. However, Fed policymakers made it clear they believe the increased inflation is “transitory” due to the unusual pent-up demand from the COVID-19 pandemic, causing shortages and lifting prices. Fed policymakers also indicated they believe such inflation rates will be short-lived and will come down to the moderate level of 2% they seek as an average. At the same time, however, due to the unease and uncertainty around inflation, the Fed stated it was prepared to fight any inflation that persisted, signaling it would raise interest rates in 2023, one year earlier than investors and economists had expected. This Fed commentary stabilized U.S. Treasury yields and even caused a rally in prices, particularly in longer maturity bonds, which are most sensitive to inflation.
Outside of the U.S., economic recovery during the semi-annual period was more uneven. China’s economy grew robustly in the first quarter of 2021 before decelerating significantly in the second quarter. Due to a lack of COVID-19 vaccines, Europe struggled early, but its economy subsequently improved due to targeted lockdowns and an increase in available vaccinations. India was not so fortunate, as it suffered severe outbreaks of COVID-19. Brazil and other parts of South America continued to have high levels of cases as well. Japan, due to a shortage of vaccines and a low percentage of its population that has been vaccinated, instituted a lockdown to counteract its spiraling cases of the pandemic. In short, the global economy was not yet growing on all cylinders at the end of the semi-annual period as much of the world still struggled with COVID-19 and its variants.
Equity Market Review
U.S. equities, as measured by the S&P 500® Index3, returned 15.25% during the six months ended June 30, 2021, its second-best first half calendar year since 1998, behind only 2019.
After a decline in January 2021 on increased COVID-19 cases and fears around new variants, the U.S. equity market was well supported through most of the semi-annual period by a combination of strong economic growth, robust corporate earnings, a gradual rollback of COVID-19 lockdowns and restrictions, an accelerated COVID-19 vaccine rollout, passage of a $1.9 trillion sweeping fiscal stimulus package in March and investor confidence the Fed would maintain its highly accommodative monetary policy for an extended period. Concerns about rising inflationary pressures led to a brief stretch of volatility mid-way through the second calendar quarter, though U.S. equities resumed their climb in early June when new jobless claims data showed a decline for the sixth consecutive week. All told, the S&P 500® Index finished June at a then-all-time high.
Value stocks significantly outperformed growth stocks across the capitalization spectrum of the U.S. equity market for the semi-annual period ended June 30, 2021, though a rotation toward growth-oriented stocks began in mid-May. Within the U.S. equity markets, small-cap stocks performed best, followed closely by mid-cap stocks and then large-cap stocks. (All as measured by the FTSE Russell indices.3)
In the S&P 500® Index, all 11 sectors generated positive absolute total returns during the semi-annual period. Energy, real estate and financials were the best relative performers. Conversely, utilities, consumer staples and consumer discretionary were the weakest performing sectors in the S&P 500® Index during the semi-annual period.
The U.S. equity markets outperformed the international equity markets during the semi-annual period. Developed and emerging market equities, as measured by the MSCI EAFE Index3 and MSCI Emerging Markets Index3, respectively, posted semi-annual returns of 8.83% and 7.45%, respectively. International equity markets, similarly to the U.S. equity market, were bolstered by an accelerating global rollout of COVID-19 vaccines, a favorable outlook for global economic
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