Broker Check

Market Commentary

July 2021


US stocks led global markets in Q2
to close First Half in double-digits

The reopening of the US economy accelerated in the Second Quarter and benefited from widespread vaccine distribution, plunging COVID-19 cases, and continued historic support by the Federal Reserve as well as US government fiscal policy. As a result, the Fed raised its 2021 US GDP (gross domestic product) estimate to 7.0% at its June meeting, up from 6.5% in March.

Reopening optimism helped drive global stocks higher in Q2, led by the US. The tech-heavy Nasdaq led the charge with a 9.5% gain, which was fueled by a decline in interest rates in Q2. This was a reversal of the First Quarter, which was led by cyclical and value stocks. The benchmark S&P 500 finished not far behind with a gain of 8.2%, and along with Nasdaq hit fresh all-time highs in June. Q1 corporate earnings were very strong (+47% year-over-year, JPMorgan) and a $600 billion bipartisan infrastructure deal could bring additional fiscal support. That is in addition to the $1.9 trillion American Rescue Plan from Q1. The Dow Industrials, mid-caps and small-caps each posted solid gains of 4%+ in Q2 but notably lagged the S&P 500 and Nasdaq. Each of the major US indexes hit multiple new all-time highs in Q2, further reflecting positive investor sentiment.

The First Half of 2021, one of the strongest since 1998 for the S&P 500, finished with double-digit gains across the board for US stocks, led by the small-cap Russell 2000 gaining 17%. The S&P 400 mid-cap index finished a close second up 16.9%, while the benchmark S&P 500 rose 14.4%. 

Overseas, both developed and emerging markets posted gains of 4.4%, as measured by the MSCI EAFE and MSCI Emerging Markets Index. Positive vaccine distribution and encouraging COVID-19 case numbers overseas led to reopening optimism as well and led to First Half gains of 7.3% and 6.5%, respectively. 

The Fed took center stage at its June meeting pivoting its policy message and Chair Powell retired the oft-used phrase “not even thinking about thinking about raising interest rates.” Additionally, the Fed projected two rate hikes in 2023, one more than previously in March. Following the Fed's June meeting, one Fed president projected it could start raising interest rates sooner than previously expected and as early as late 2022. Still, interest rates fell sharply in Q2 from the inflation led highs hit in Q1 as the Fed eased inflation fears noting recent “hot” economic numbers as “transitory.” The benchmark 10-year Treasury Note yield fell 29 basis points in Q2 to 1.45%, as the yield curve flattened a bit. The Barclays-Bloomberg Aggregate Bond Index gained 1.9% in Q2 and cut its loss for the year to 1.3%.

The Outlook

The Year of Transitions continues with positive momentum both economically and from a COVID-19 global health perspective. Economies around the global continue to reopen with pent up demand, while vaccine distribution and COVID case reduction remains encouraging.   Our market and investment posture continues to be cautiously optimistic for the Second Half of 2021 and the return to normal appears more in grasp should vaccine and health trends continue on course. Again, amid the many encouraging positives, we urge investors to not get complacent with risk.

Point by Point

  • Positive Second Half of 2021 for the market but not a repeat of First Half performance
  • Plenty of Stimulus: With the additional $600 billion in spending bipartisan infrastructure plan (which still must be passed by Congress and signed into law), the $1.9 trillion American Rescue Plan from Q1, and continued Fed monetary support, economic growth projections remain exceptionally strong for 2021 at +7.0% and +3.3% for 2022 (Fed)
  • Q2 Corporate Earnings have been very strong and Q2 earnings growth for the S&P 500 is expected to be 69%+ year-over-year, according to FactSet, the highest level since Q4 2009
  • Valuations remain stretched; a pullback/consolidation would not be a surprise; volatility expected to increase in Q3 but refrain from changing course
  • Two biggest risk factors: a surprise change in Fed policy and the COVID-19 Delta variant among the unvaccinated in the US and overseas
  • Maintain diversification, discipline, and keep your focus long-term
  • Refrain from chasing returns and making large portfolio changes
  • Maintain regular contributions and a rebalancing program 

Call your Nelson Advisor today at 800-345-7593 to discuss any concerns and review your portfolio.

~Your Nelson Securities Team 

 *Past Performance is No Guarantee for Future Results