The COVID-19 pandemic appears to be less dramatic and lethal than some historic plagues and vaccinations will limit impact. Unfortunately, after substantial progress, the world faces a new enemy in the Delta variant. This highly contagious form of the virus devastated the subcontinent in spring and has now spread to almost 100 countries including the U.K., Spain, Russia, South Africa, Indonesia, Thailand, Bangladesh, and Malaysia where it has sparked a resurgence of cases. Signs of accelerating inflation around the world may be transitory or more lasting. How central banks respond to price pressures during a post-Covid economic rebound will determine inflation’s impact. We have maintained our economic outlook of three months of Growth followed by Stagnation for the remainder of our twelve-month forecast horizon.

The Chinese economy grew by a seasonally adjusted 1.3% in Q2 2021.1 China’s economy sustained a steady recovery, with production and demand picking up, employment and prices remaining stable, market expectations improving, and major macro indicators staying within a reasonable range. In Europe, the improving health situation and ensuing continued easing of virus containment measures are putting the economies and tourism back in motion, which should also benefit from the new EU Digital COVID Certificate.2 These factors are expected to outweigh the temporary production input shortages and rising costs hitting parts of the manufacturing sector.

The U.S. economy continues to recover, following a Q1 expansion of 6.4% annualized.3 Household spending is likely to be the main driver, with business investment also contributing to growth. Residential investment is expected to slow from its recent pace, and the labour market is expected to take more time for the upside effects of reopening to be fully absorbed. The Fed is expected to keep its monetary policy extremely accommodative in the coming months.

The IMF has predicted that U.S. GDP will rise above the level expected before the pandemic, at least temporarily. Forecasts are driven by four current positive factors. 1) Business finances are healthy. Most recessions in the past had financial causes. The current recession was met with firm government action that bolstered the financial system and most businesses’ balance sheets. That leaves businesses ready, willing, and able to spend once they get the signal that they can do so safely. 2) Households, particularly higher income, are sitting on savings of about US$2.8 trillion more than in Q1 than under “normal” circumstances before the pandemic. Since consumers in aggregate didn’t take on more debt, balance sheets are healthy. 3) The pandemic accelerated productivity trends, particularly telecommuting and e-commerce, that were already underway, forcing managers and consumers to adopt new technology with little notice. 4) Government spending is expected to continue to support growth. The pandemic relief bills were instrumental in keeping the economy poised for growth once vaccinations are widespread—even if not every expenditure was an effective use of money.4

The Canadian economy has already recovered nearly 80% of the jobs lost during the Covid-19 induced recession.5 The rollout of vaccines got off to a slow start in Canada but picked up in the spring when availability improved. The increase in vaccinations has enabled provinces to loosen restrictions. Jobs for lower income Canadians remain well below pre-pandemic levels.

U.S. equities ended Q2 strong, with the S&P 500 posting a gain of 8.6%, despite inflation concerns and uncertainty over the future course of the Fed’s stimulus efforts. In a reversal from Q1, the S&P MidCap 400 and S&P SmallCap 600 underperformed, up 3.6% and 4.5%, respectively. Canadian equities posted gains, with the S&P/TSX Composite up 8.5%. After reaching a new all-time high at the start of the quarter, the S&P Europe 350 continued to set new records through Q2. The broad-based index finished with a 1.7% total return for the month, making it 6.7% for Q2, and 16% YTD. Switzerland, France, and the United Kingdom made the biggest positive contributions over the quarter, with each adding more than 1% to the S&P Europe 350’s returns. Asian equities rose in Q2, with the S&P Pan Asia BMI up 3.2%.  All Asian single-country S&P indices posted gains.

In July, we maintained our asset allocation from June for all portfolio models. The U.S. economy appears to be losing momentum again as the delta variant is spreading through the primarily unvaccinated population in America. Fiscal spending that funds local governments supports our exposure to treasuries and municipal bond exposure in the U.S. The yield curve flattened in June, and Treasuries have outperformed corporates and high yield. We continue to include gold in the asset allocation as a portfolio stabilizer during volatile equity markets.

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. 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. Investment in structures—especially office and retail buildings—is likely to lag while businesses are expected to double down on technology investment. Growing e-commerce will mean growing demand for light vehicles and medium-weight trucks for delivery services along with a demand for drivers, gasoline, and related products. 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 Growth Rate, National Bureau of Statistics of China. July 15, 2021.

2 European Economic Commission. July 7, 2021.

3 Trading Economics. U.S. GDP Growth Rate. June 24, 2021.

4 Deloitte Economic Outlook. 2021.

5 The Conference Board of Canada. July 6, 2021.


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