At the start of the year, inflation was widely expected to pick up as the base effects of a collapse in energy prices in the spring of 2020 began to show up in year-on-year inflation readings. The magnitude of the increase now appears to extend beyond those effects due to the ongoing rise in commodity prices, persistent and more severe bottlenecks in manufacturing supply chains, and jumps in the price of certain items of the Consumer Price Index, such as used cars, travel, and accommodation. Looking ahead, most of these inflationary impulses are likely to fade over the next twelve months as supply bottlenecks ease. In addition, there is a sizeable pool of unemployed workers, unlike in most previous inflationary episodes, even if there is no precedent for the kind of shock the U.S. and other economies have undergone over the past 18 months.

In mid-July, our growth concerns were largely driven by the delta variant. Fortunately, the delta wave is not generating a high level of hospitalizations or fatalities to force the reintroduction of lockdowns in major Western economies. Currently, Chinese growth and regulatory risks and Fed tapering concerns in addition to retail sales contractions in the U.S., China, and the U.K. are our primary risk concerns. On the geopolitical front, the chaotic U.S. withdrawal from Afghanistan is ongoing. In August, we updated our twelve-month forecast to reflect our view that Stagnation is no longer a risk. Our current twelve-month outlook is for Growth (U.S. GDP greater than 2.5%) through the period.

China has centralized political power to move rapidly on reforms, creating new structural problems while antagonizing foreign nations. The Chinese economy advanced 7.9% year-on-year in Q2 of 2021. A slowdown in factory activity, higher raw material costs, and new COVID-19 outbreaks in some regions all weighed on the recovery momentum.1 The Eurozone quarterly economic growth was confirmed at 2.0% in 2021 Q2, following two consecutive periods of contraction. Among the bloc’s largest economies, Germany, France, Spain, and the Netherlands returned to growth.2 The Euro Area seasonally adjusted unemployment rate edged down to 7.7% in June. The U.K. unemployment rate fell to 4.7% in Q2 although the rate remained 0.8 percentage points higher than before the pandemic.3

The U.S. economy advanced an annualized 6.5% in Q2 2021. Personal consumption expenditures grew 11.8% as vaccinated Americans traveled and engaged in activities that were restricted before.4 U.S. CPI stood at 5.4% in July 2021, unchanged from previous month’s 13-year high.5 The U.S. unemployment rate was 5.4% in July. These levels remain well above their levels prior to the coronavirus pandemic (3.5% in February 2020).6 Fed officials expressed a range of views on the appropriate pace of tapering asset purchases, but most noted that it could be appropriate to start reducing the pace of asset purchases this year, provided that the economy was to evolve broadly. The Fed left the target range for its federal funds rate unchanged at 0-0.25% in July.7 In Canada, the annual inflation rate increased to 3.7% in July of 2021 from 3.1% in June.8 The unemployment rate fell to 7.5% in July from 7.8% in June.9 The Bank of Canada left its key overnight rate unchanged at 0.25% on July 14th but adjusted the quantitative easing program to a target pace of $2bn from $3bn per week.

U.S. equities generally ended  July in positive territory, with the S&P 500 posting a gain of 2.4%. S&P MidCap 400 posted slight gains of 0.4%, while the S&P SmallCap 600 fell 2.4%. The S&P/TSX Composite was up 0.8%. Asian equities declined, with the S&P Pan Asia BMI down 4.1%, led by heavy losses in China, as a result of Beijing’s clampdown on tech companies. The S&P Europe 350 continued to climb, marking new all-time highs, as it rode to a total return of 1.8%. With the U.K. lagging this month, Switzerland, France, and the Netherlands lead; contributing more than half of S&P Europe 350’s returns.

In August, we maintained our asset allocation from July for all portfolio models. The U.S. economy is slowly recovering. Fiscal spending that funds local governments supports our exposure to treasuries and municipal bond exposure in the U.S. The yield curve flattened in July. We continue to include gold in the asset allocation as a portfolio stabilizer during volatile equity markets.

Our outlook hinges on whether the sources of recent disappointment related to the Delta wave, China policy, and global supply constraints are transitory.  Concerns remain about the global spread of the pandemic and an unbalanced recovery domestically. The changing picture of the economy comes with structural changes that will challenge some sectors. The economic reopening and the global stimulus that is underway will lead to improved household liquidity, healthy consumer balance sheets, and a healing labor market. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.


Deborah Frame, President and CIO


1 Trading Economics. China GDP, National Bureau of Statistics of China. July 15, 2021.

2 Trading Economics. Europe GDP. August 17, 2021.

3 Trading Economics. Europe Unemployment, Office for National Statistics. July 30, 2021.

4 Trading Economics. U.S. GDP, U.S. Bureau of Economic Analysis. August 26, 2021.

5 Trading Economics. U.S. Inflation,  U.S. Bureau of Labor Statistics. August 11, 2021.

6 Trading Economics. U.S. Unemployment, U.S. Bureau of Labor Statistics. August 6, 2021.

7 Trading Economics. U.S. Federal Reserve. July 28, 2021.

8 Trading Economics. Canada Inflation, Statistics Canada. August 18, 2021.

9 Trading Economics. Canada Unemployment. August 6, 2021.


Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. July 30, 2021. Index performance is based on total returns and expressed in the local currency of the index.