As summer began, stocks continued their march higher as the S&P 500 gained 15.3% including dividends in the first half of 2021, according to Bloomberg data. The DJIA was up 13.7% while the Nasdaq 100 climbed 13.2%. S&P 500 Growth rose 14.3% while S&P500 Value was up 16.30%. New all-time highs are happening daily in recent trading sessions.
Energy topped all sectors in the first half gaining 45.1% while utilities lagged at an increase of just 2.4%. U.S. 20 Year Treasuries were down -7.9% and the Aggregate Bond Index declined -1.7%. Grayscale’s Bitcoin Trust (GBTC) lost -6.8% while Gold declined -7.1%. Emerging markets gained 7.2%, EAFA was up 9.6% and China 's CSI index rose 3.5% in the first half.
In summary, most global equity markets went higher, Bitcoin went down, and safe havens like U.S. Treasuries and Gold lost value. The “growth versus value” debate continues as does concern over cyclicals versus growth stocks.
We still have more than nine million unfilled jobs in the U.S. We have the Fed "talking about" taking their foot off the monetary accelerator that has been floored since last March.
Inflation recently hit 5%, yet Treasuries rallied on the belief that such levels are just temporary.
It seems 2/3 of economists believe the Fed has the inflation thing under control, while the rest are doubtful.
Fiscal stimulus measures are in place, and more are coming. The latest talk for "infrastructure" spending is around $1 trillion, but the Democratic wish list is as high as $6 trillion. Such a bill could not pass in the Senate but will go through a process called reconciliation, wherein a bill gets passed by majority Democratic votes without Republican support. This is similar to when Obamacare was passed.
We shall see what eventually emerges before year end. We will find out which taxes are raised to pay for some of this new government largesse.
It used to be one party or the other spoke about fiscal responsibly and how we might pay down the national debt. Now much of the sound from Congress on this issue is crickets.
While the band continues to play, the champagne flows and many of the guests at the party dance.
Vaccine news is good in the U.S. and has led to a robust economic reopening, Europe and the U.K. are slower but now on the right track. The rest of the world, sans China, are badly trailing in vaccinations and presumed corresponding economic pickup, but their stock markets are all recovering nonetheless.
Our main concerns currently are with valuations, tax increases and potential foreign conflicts.
Chairman Xi Jinping wants reunification with Taiwan which is home to much of the world's semiconductor capacity. Given recent clampdowns on electoral and journalistic freedoms in Hong Kong, this threat is real. The Taiwanese will not go down without a fight.
President Biden has spoken about higher corporate and personal income taxes. He has done much to unravel President Trump's anti-regulation movement. We will see what the future brings in these areas.
As for valuations, which are at the high end of the historic spectrum for stocks, they are very dependent of interest rates which are near historic lows. Inflation and Fed policy drive rates and both are data dependent.
The value of the U.S. dollar has recently held up very well, rallying 3% from the January 6th and May 25th lows. However, it should be noted we have witnessed a dollar decline of about -10% since its March 23rd peak. The weaker our dollar becomes the higher the cost of our imports, which are about 15% of U.S. GDP.
Fiscal spending in the EU and Japan are also very high given Covid-19 concerns and monetary spigots are fully open worldwide.
As of the end of June, AAII sentiment is 48.6% bullish, 29.2% neutral and 22.2% bearish. Historic averages for bulls are 38%, neutral 31.5%, and bears 30.5% so optimism reigns for now.
Earnings for Q2 should be impressive but much is now baked into prices. We await earnings reports and Congressional ruminations on tax and spending policies.
We wish you all a very pleasant summer with family and friends.
Happy July 4th!
Doug Coppola - Investment Committee Chairman
Steve Lindgren - Chief Investment Officer