Mid-Year Market Commentary

After a nearly 90% rally off the March 2020 lows, it’s not much of a surprise that since mid-April the S&P 500 Index has been choppy and generally moved sideways. Consider that the 1982 and 2009 bull markets both suffered from some fatigue several months into their second years, providing a useful historical analogue. With the U.S. economy picking up speed as the end of the pandemic approaches, the economic cycle is maturing. The pickup in inflation and related concerns about the Federal Reserve (Fed) pulling back support offer evidence of an economic cycle getting a bit older. Older cycles tend to bring more moderate stock market gains.

Coming off a stunning first-quarter earnings season that saw results well ahead of the best-case scenario for nearly all strategists, corporate America is firing on all cylinders. Equities had strong positive performance in the first quarter. The S&P 500^® returned almost 6.0% on a price basis, with small caps returning 12.4% to trounce the Nasdaq’s 2.8% return as investors rotated away from large cap, defense sector, and tech stocks. Emerging market equities gained almost 2.0%, while developed market equities outside of the U.S. had positive returns ranging from 4.0% to 9.0%. U.S. 10-year Treasury interest rates rose 83 basis points in the first quarter from the end of December 2020, driven by higher growth and inflation expectations.

At the end of the first quarter of 2021, the U.S. economy continued to rebound from the recession caused by the COVID-19 pandemic.  In the wake of strong first-quarter earnings, Wall Street analysts have recently upgraded their expectations for second-quarter results.  During April-May, analysts raised their earnings forecasts for S&P 500 companies by 5.8%, according to FactSet.  This is the largest such increase since the research firm began tracking the metric in 2002.

At Kennedy Financial Group, our outlook for 2021 is unabashedly positive. We see the potential for a recession in 2021 and 2022 as relatively unlikely, but recognize a few challenges and risks still lie ahead. We are forecasting a very solid rebound in U.S. GDP growth for 2021, driven by a gradual reopening and normalization of the service sector of the economy as the COVID-19 pandemic is brought under control with vaccine rollout.

Fiscal policy remains very supportive for growth, much as we expected, with $1.9 trillion in additional fiscal stimulus passed by the Biden administration earlier this year.  Monetary policy also remains very supportive for growth. The Federal Reserve has clearly stated it will not be raising interest rates for several years and has increased its expectations for growth, employment, and inflation in its latest forecasts. With both monetary and fiscal policy acting in tandem, we expect the growth surge will be strong and could last into 2022 or even 2023.

While the 2021 outlook is optimistic, we note that there are several challenges that must be overcome. Our optimism on the COVID-19 front has proved justified as distribution and administration of the various vaccines have improved, with the U.S. becoming a global leader in vaccination. Our expectation of a full reopening of the U.S. economy by mid-2021 seems to be on track, which means the rebound in the service sector, which is about 80.0% of the economy, will happen around that point

Overall, our outlook for growth in 2021 has brightened further. We continue to see positive momentum in the economy, a rebound in growth, slightly higher interest rates and inflation, and solid single-digit equity returns. But we caution that we could see greater volatility as well, given that nothing undermines a bull market more than a bull market continuation in which momentum and positive returns feed investor confidence to the point where fundamentals are overlooked. In our opinion, we are not at that stage yet.

We expect additional gains for stocks in the second half of the year, but they are likely to be more modest than the gains we have seen so far, and those additional gains are likely to come with more volatility. Amid a backdrop of an improving economy, massive levels of fiscal and monetary stimulus, and rising vaccination rates, we would not expect pullbacks to last very long and any potential corrections are likely to be shallow. We would be looking for opportunities to add equities on potential dips. Inflation, possible interest-rate spikes, higher taxes, COVID-19 spread outside the U.S., and geopolitics are among the primary risks to our forecast.

At Kennedy Financial Group, our purpose is to help you live your best and most fulfilling financial life, and be a guide for you on your personal financial journey.  We diligently maintain our long-term disciplined focus to portfolio management with an emphasis on a diversification, quarterly rebalancing, and a forward-looking approach to asset selection.

To find out more about our process, schedule a call with us today.

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Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through HighPoint Advisor Group, a Registered Investment Advisor. HighPoint Advisor Group and Kennedy Financial Group are separate entities from LPL Financial.

This presentation was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational presentation.

The content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Any economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that any strategies promoted will be successful.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market.