By Tim Courtney, Chief Investment Officer
The second quarter delivered strong earnings, low volatility and promising economic data – from retail sales to hotel occupancy to employment numbers – all of which collectively confirmed we are well on our way to a strong economic recovery post pandemic. Further, the markets reacted to increased government spending and new COVID variants in stride and for the most part did not show signs of stress or slowing.1
Market valuations are not cheap, however, and investors will be closely watching a variety of factors that could determine how markets move during the summer months.1
As we step into the third quarter, we will be monitoring the following three themes very closely:
- Earnings: First quarter earnings ended at record levels across the market spectrums of size and sector. Valuations assumed strong earnings and stocks are still priced for great future earnings growth.2 We expect that earnings strength will continue based on the economic data we are seeing, but unexpected weakness would likely mean much more volatile market movements.
- Regulation: Regulation will be a major wildcard as we head into the third quarter. Revised regulatory and antitrust frameworks are becoming more likely since support is now coming from both sides of the political aisle.3 In addition, changes to the corporate tax rate, capital gains and estate tax exemption levels are still on the table and we believe likely to be implemented in some form.4 These changes could meaningfully affect multiple companies, and we are watching this closely.
- Inflation and interest rates: When you hear rumblings of banks turning away deposits, it’s clear there is an abundance of capital flowing around the country. Some of this is evident in inflation – especially in housing market prices, with home prices increasing at the fastest pace on record.5 While earlier in the year the Federal Reserve believed that higher long-term inflation was unlikely, more recent communications have indicated many in the Fed have become more concerned. Interest rates did drop during the second quarter, and we will watch how interest rates react to coming data and Fed points.6
As investors, we must acknowledge that there is always risk present in markets. Any one of these items could surprise markets and cause an end to 15 months of nearly uninterrupted market growth.1 We believe a normal correction would actually be healthy and clean out some of the excessive borrowing and speculation in certain areas of the market that have built up over the last year. However, we do think the recovery will continue throughout 2021 and into 2022, with interest rates and consumer confidence slowly rising through the recovery. If you have any questions please be sure to contact your advisor.
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
1. Yahoo! Finance (6/25/21) – S&P 500
2. Nasdaq (4/21/21) – A very strong earnings picture for Q1 and beyond
3. Protocol (1/1/21) – Regulation is coming in 2021. Here’s how big tech is preparing for it.
4. Tax Foundation (6/16/21) – Details and analysis of President Biden’s FY 2022 budget proposals
5. CNN Business (6/19/21) – The housing market is on fire. The Fed keeps adding gasoline
6. Reuters (6/24/21) – Analysis: Fed’s mixed messages on inflation unsettle investors
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