3rd QUARTER 2021 MARKET OUTLOOK
Anxiety over COVID-19 diminished dramatically during the 2nd quarter due to widespread vaccination efforts that led to dramatically falling infection rates and deaths. This provided a powerful backdrop for the U.S. economy to continue its strong recovery, fueled by exceptionally low interest rates, government fiscal support programs, increasing employment, and healthy consumer spending.
Not unexpectedly, the equity market responded to this very positive environment by surging during the 2nd quarter, with the S&P 500® up over 8%. However, value and small cap sectors of the market, which are considered the prime beneficiaries of the economic reopening, began to again lag in performance relative to the large cap growth sector with its heavy orientation to technology. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.)
However, in a very unexpected twist, interest rates reversed the upward trajectory they had been on due to inflation fears, and actually declined by roughly 0.2% for longer term treasury bonds. This is surprising given the dramatically higher levels of reported inflation statistics and evidence that Federal Reserve (Fed) policy makers may be preparing to move away from extremely low interest rate policy they have followed for some time.
As the second half of 2021 approaches, it is a good time to assess key elements of the economy and to consider whether any changing dynamics warrant changes to investment strategy or tactics.
Let’s start with some of the key elements that continue to support the economy and markets:
Now for some key elements that are changing:
With interest rates remaining stubbornly at levels that are well below reported or expected inflation, fixed-income returns will continue to be lackluster at best. But exceptionally low interest rates continue to be a bulwark against any significant correction in the equity markets.
We remain moderately overweigh equities. But in such a high valuation market, with inflation signals flashing warning signs, and growth likely peaking, we continue to believe this is not a time to be aggressively positioned in the portfolios.
Some speculative dynamics of the market, such as “meme” stocks and cryptocurrency trading, are abating. Security selection, focusing on quality, durability and solid fundamentals regardless of sector is expected to prevail as the second half of the year unfolds.
Outside the U.S. equity market, the developed markets, particularly Asia and Europe, appear to be in a better position than the emerging markets. Emerging markets may be challenged by rising interest rates, a stronger dollar and declining commodity markets.
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All information and representations herein are as of 07/07/2021, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Past performance is not necessarily indicative of future results.