Major US Equity benchmarks closed the first half of the year at or near all-time highs, as the market continues to feed off strong economic tailwinds. We have now completed five full quarters since the bottom fell out of the market last March, and all five have been positive. The first half of this year has seen the reopening of the economy accelerate as more people return to work, which has been a long-awaited boost. The S&P 500 finished the quarter up over 8%, maintaining its blistering recovery from the March 2020 lows, which are beginning to feel like a blip on the radar. The Dow had a slower quarter, only gaining 5% while the Nasdaq picked up its performance, gaining over 11% in Q2. Following two straight quarters of underperformance, growth stocks loosened their sails once again and led the way, showing they still have more room to expand. After being outgained by value the last few months, growth stocks showed why they should continue to play a part in a portfolio. It is also worth noting that the Dollar had its strongest month since 2016, which has largely led to extreme underperformance in international stocks, which continue to fall out of favor. 

At the midway point of the year, energy (45%), financials (25%), and REITS (22%) lead the way after being the three worst sectors in 2020, showing the healthy rotation we have been awaiting. The strongly anticipated reopening trade began to show promise as well as many believed we were exiting the shadows of the COVID lockdowns. However, after the last few weeks, it is clear that we are not out of the woods yet as cases are beginning to rise again and the fear of the Delta variant leaves investors skeptical of the full reopening process. We are also midway through the earnings season and are seeing incredible results so far, with over 88% of reporting companies beating expectations. After months of stock prices rising without much support from earnings, valuations were becoming uncomfortably stretched, so it is nice to see natural compression of multiples through a drastic rise in earnings thus far. 

Although everything seems to be trending in the right direction, there are plenty of variables that could still shake up the surging momentum in the markets. Obviously, a primary concern is the emergence of the Delta variant. Though we do not believe we will see a shutdown similar to last year, any delay or setback in reopening could be unsettling for many investors and for expectations. Furthermore, the inflation concern continues as the Fed once again reiterated its commitment to keeping rates low. Many people worry inflation will run rampant with the haphazard stimulus, despite the Fed’s reassurance that inflation is transitory and will be under control. Even if inflation begins to run too hot and the Fed has an unanticipated rate hike to cool the system, this rise in rates would more than likely have a negative impact on equities. With all this being said, one mantra has held true time and time again, “don’t fight the Fed,” so why should we act any differently now?

Ultimately, we expect to experience bouts of volatility as we navigate the rest of the year. We got a slight taste for such earlier this month as the market fell over 3%, culminating in a July 19th drop that left the Dow with its worst daily performance since October of 2020, dropping over 700 points. We would expect to see true drawdowns in excess of this aforementioned 3%, but barring a change in market and economic conditions, these should be viewed as opportunities rather than setbacks. Three of the main drivers of equity growth remain in our favor: the fed is still accommodative, GDP is rapidly growing, and corporate earnings are rising. As long as those conditions remain, there continues to be opportunity. 

John Webb 

Financial Advisor 
Pinnacle Asset Management 
Raymond James Financial Services 
Kidd Private Wealth Group