Thus far in 2021 the US stock market can be summed up with one word- resilient. As we enter the second half of the year, and as the market sits near all time highs, we believe stocks and bonds are focused on two things:
- Inflation – Will the FED change their publicized stance to remain accommodative given any divergence between expected and actual inflation
- Continued Economic Recovery – how it will proceed and is there something (inflation, interest rates, etc) that will cause it to stall in the coming months.
Interesting to note- the market lacks breadth meaning it could be very vulnerable to an unknown surprise or shock. For example, while the stock market has continued to grind upward and hit new highs; the majority of stocks in the index are not driving that performance. In fact, over 50% of stocks in the S&P 500 are trading below their 50-day moving average. Hard to believe for a market making all times highs.
This can also be seen in the underperformance of the S&P 500 equal weighted index relative to the S&P 500 market cap weighted index as seen in the chart below. In other words there is not broad participation from all stocks– larger market cap companies contributing to most of the performance of late.
Overall, we are optimistic for the 2nd half of the year but won’t be surprised to see increased volatility as we come out of the summer. We have maintained a mostly neutral approach in our portfolios – no sweeping changes, and look for the market to provide us with more direction as we go into Q3.