It was a remarkable first half of 2021 for stocks—the S&P 500 returned 15% and closed at another record high. Perhaps more remarkable—the strong start comes on the heels of a 17% return in 2020 and 18% return for 2019. It has been an epic run for U.S. equities.
Even after this bull run, we are still positive on select stocks and commodities. However, the “easy money” in this cycle has been made. The COVID/stay home stocks, like Zoom, watched their 15 minutes of fame expire and their share prices return to earth. The recovery stocks, like Live Nation, have … well … recovered.
Life has returned to normal and stock returns should follow. It is now time to return to the themes driving this decade as the “stay home” and “reopening” phases are in the rearview mirror.
In the halftime report below we explore this driving force behind the rally and share our thoughts on where to invest for the rest of the year.
A Little Secret – Come in closer, closer, we would like to share a secret with our friends: the game of investing is currently rigged in favor of stocks. It is no secret that stocks appreciate over time and financially reward patient investors. Below is a chart of the S&P 500 Index since 1996 as proof.
Investors experienced dips along the way, but stocks go up over time. However, this is common knowledge. The real secret …
The government and Federal Reserve have supported equity investors on dips in the market. In the past year, the government flooded the economic system with $6 trillion in stimulus. And, there is talk of an additional infrastructure bill for $1 trillion and child credits hit accounts this month for $300 per month for each child.
What started as “too big to fail” in 2008 has turned into “too innocent to fail” in 2020. Since the great recession of 2008, economic conditions controlled by the government have favored U.S. equity investors. We do not see the conditions changing any time soon but are very aware that this cannot last forever.
The Data - In the face of a massive recession in 2020, the annual GDP remained steady. Further, earnings of companies dipped, but then rebounded rapidly to make up for the decline and are now stronger than before. The following is a chart of U.S. GDP and the earnings of the S&P 500 to illustrate this point:
With interest rates low (negative if inflation adjusted), stock investing is one of the few liquid investments to help investors achieve their goals. Special thanks to Chairman Powell and the U.S. government. We are certainly aware of the arguments against this thesis and watch vigilantly for the tide to turn back to more normal conditions.
Crystal Ball – Thoughts on the Second Act
No Free Lunch – There must be a price to pay for the massive stimulus. The price is called inflation. Inflation is real and can be felt in many areas of life from home prices to chicken wings. To hedge the portfolio against inflation we own commodities and stocks in companies benefiting from the rise in commodity prices.
Another consequence of this hot economy is bubble-like conditions in certain asset classes. Please see Dogecoin or Meme Stocks as examples. We continue to avoid these areas and fight the FOMO urge. While the wounds from dot-com bubble of 1999 are healed by now, the lessons learned are front of mind as we observe crazy valuations and panic buying by speculators. Another secret for our friends:
Correction of 5-10% – The S&P 500 has gone 170 trading sessions without a 5% pullback. This is rare and ranks among the longest periods in history without a 5% pullback. We believe there will be a pullback of 5, 10, or even 15% in the second half. This would be much more normal than if there was not.
Technology Revolution Continues – All of the COVID hysteria has diverted some attention away from the progress that many corporations have achieved in the past year to make their business operations more efficient and more profitable. The technology revolution is still in the early innings. We remained invested in stocks to benefit from the digital transformation—5G, Machine learning, AI and big data.
Clean Energy – One not-so-secret theme in 2021 is clean energy. We remain excited for the next decade and will soon move this to the technology revolution theme as technological advances have made a clean energy future with more carbon-friendly energy, recycled plastic, and clean drinking water a reality. We continue to believe that the next Apple, Google, and Amazon will be in the area of clean energy technology.
Bon Voyage – While the U.S. has returned to pre-pandemic travel levels, our friends on the other side of the pond (Europe) are in the earning stages of their recovery. Thus, we have implemented positions to participate in the reopening of Europe.
In Summary – With the pandemic in the rear-view mirror, we can now look to a normalization of the stock market and U.S. economy. The return to normal is welcome. Returning to normal lifestyles, a normal economy and normal markets is not just exciting but necessary. But normalization from such strange dislocations like “work-from-home,” government stimulus money, and very loose monetary policy does not always happen smoothly. While the underpinnings of the economy are strong and should remain strong, it would be normal to experience a normal amount of market volatility during this process. That said, we continue to be bullish on equities globally.
INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES, INVESTMENTS OR INVESTMENT STRATEGIES. BLOOMBERG IS THE SOURCE OF MARKET DATA. INVESTMENTS INVOLVE RISK AND ARE NOT GUARANTEED. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RETURNS. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY DISCUSSED HEREIN.