Last Year’s Stock Market Rally Extends into 2021
Last year’s stock market rally was an explosive recovery that saw the major market averages set new highs. We’re well into 2021, and the major market averages have continued to push to new heights.
Figure 1 highlights the six longest running bull markets since WWII and compares them to the performance of the current bull run. Through the end of July, the current bull market, as measured by the broad-based S&P 500 Index3, takes the top spot. It exceeds the early performance of the long-running bull market that was born out of the 2008 financial crisis.
Before we get carried away and extrapolate today’s upward move, let’s also point out that the nearly 10-year bull market of the 1990s got off the ground slowly. In other words, let’s state something we already know, but bears repeating. Past performance is not a guarantee of future performance.
A review of the major themes driving stocks
If we step back and look at what is driving stocks, we can’t credit just one variable. Instead, several tailwinds have been responsible for the strong rally. These include:
- The Fed has provided super easy money. Interest rates are extremely low, which encourages investors to seek out stocks for more acceptable returns. The Fed has also been buying about $120 billion in bonds each month, which pumps additional cash into the financial system.
- The strong economic recovery has been a tailwind. It’s expensive, and it raises the federal deficit, but strong fiscal stimulus puts cash into the hands of consumers, which helps drive economic activity.The U.S. BEA reported that Gross Domestic Product (GDP), the largest measure of goods and services, expanded at an annual pace of 6.5% in Q2, up from 6.3% in Q1. Consumer spending was an important component in the robust reports.In addition, the vaccines have accelerated the reopening. Notably, spending in Q2 was strong for service-related businesses tied to activities outside the home. The U.S. BEA reported that Gross Domestic Product (GDP), the largest measure of goods and services, expanded at an annual pace of 6.5% in Q2, up from 6.3% in Q1. Consumer spending was an important component in the robust reports.In addition, the vaccines have accelerated the reopening. Notably, spending in Q2 was strong for service-related businesses tied to activities outside the home.
- Plus, the strong economic recovery has led to huge gains in corporate profits, which have far exceeded analyst forecasts in recent quarters, according to Refinitiv. As economic growth seems set to moderate in the third quarter, we’ll likely see profit growth moderate. However, analysts surveyed by Refinitiv continue to boost earnings forecasts in Q3 and Q4, which lends support to equities.
Looking at it as an equation, low interest rates + strong corporate profits tied to upbeat economic growth have led to a series of new highs in the major market indexes.
Yet, markets are never without risk. While there have been no major recent corrections, the risk we might see some type of pullback later in the year can’t be dismissed.
Economic growth is expected to continue this year, barring a sharp uptick in new Covid cases and related restrictions, which could create stock market volatility.
Inflation has been much higher than the Federal Reserve and many analysts had expected. If the surge in inflation isn’t temporary and proves to be more persistent than expected, we could see the Fed hit the monetary brakes faster than most anticipate.
For now, the Fed’s own projections released in June suggest the central bank may be penciling in two small rate hikes in 2023. Even if that occurs, rates would remain low by historical standards.
Except for the 1987 stock market crash, bear markets (a 20% or greater decline in the S&P 500 Index), have been centered around recessions, according to S&P 500 data from the St. Louis Federal Reserve and Yahoo Finance. That streak has been in place since the mid-1960s.
Still, while long-term financial plans don’t eliminate risk, they help manage risk and take market volatility into account.
Following the big gains in stocks, it’s important to add that the investment plan is also designed to keep investors from taking on too much risk, when big market gains sometimes encourage individuals to dive too heavily into stocks.
If you have any questions or want to discuss any other matters, please feel free to reach out to your advisor.
1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
2 The NASDAQ Composite is an unmanaged index of companies which cannot be invested into directly. Past performance does not guarantee future results.
3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.
4 The Global Dow is an unmanaged index composed of stocks of 150 top companies. It cannot be invested into directly. Past performance does not guarantee future results.
5 CME Group front-month contract; Prices can and do vary; past performance does not guarantee future results.
6 CME Group continuous contract; Prices can and do vary; past performance does not guarantee future results.
It is important that you do not use this e-mail to request or authorize the purchase or sale of any security or commodity, or to request any other transactions. Any such request, orders or instructions will not be accepted and will not be processed.
All items discussed in this report are for informational purposes only, are not advice of any kind, and are not intended as a solicitation to buy, hold, or sell any securities. Nothing contained herein constitutes tax, legal, insurance, or investment advice. Please consult the appropriate professional regarding your individual circumstance.
Stocks and bonds and commodities are not FDIC insured and can fall in value, and any investment information, securities and commodities mentioned in this report may not be suitable for everyone.
U.S. Treasury bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government.
Past performance is not a guarantee of future results.
Different investments involve different degrees of risk, and there can be no assurance that the future performance of any investment, security, commodity or investment strategy that is referenced will be profitable or be suitable for your portfolio.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.
The information contained is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.
Before making any investments or making any type of investment decision, please consult with your financial advisor and determine how a security may fit into your investment portfolio, how a decision may affect your financial position and how it may impact your financial goals.
All opinions are subject to change without notice in response to changing market and/or economic conditions.
All rights reserved