by Maurice (Mo) Spolan, Investment Research Analyst
Last week, the S&P 500, Nasdaq and Dow were up 1.71%, 1.39%, and 1.5%, respectively. The positive week was consistent with first half performance for the three leading indices, all of which are up between 12.5%-14.4% through 2021’s first six months. The Dow had a quick start to the year while the tech-heavy Nasdaq lagged, but at this point, the performance disparity between any of three indices is immaterial, illustrating the breadth of the market rally.  Historically, strong first-halves portend strong second-halves; per Refinitiv, in every year since 1950 in which the S&P and Dow were up double-digits to start the year, they were positive in the final six months.

Economic indicators also suggest a strong second half of 2021 is forthcoming. The unemployment rate is well within normal range, sitting just below 6%, while the housing economy – represented by home prices and remodeling & renovation activity – is in its strongest condition since the Great Financial Crisis. Crude oil is priced at $75 – a three-year high – as the appetite for travel and mobility are surging. As a result of these trends and more, the International Monetary Fund has increased its projection for U.S. 2021 GDP growth from 4.6% to 7%; should the forecast come to fruition, it would represent one of the strongest years on record.

If there is a risk to the economy – and therefore, possibly the markets – over the coming six months, it is that of overheating. Inflation surged above 4% in April as aforementioned demand trends met a constrained global supply chain, leading to higher prices. Inflation cooled somewhat in May, increasing approximately 3.5% year-over-year. The traditional monetary policy response to inflation is rate hikes, as these incentivize consumers to save rather than spend. The Federal Reserve holds a long-term inflation target of 2% but has stated that it will let inflation run above 2% for some time to facilitate a strong economy. Jay Powell, the Fed Chair, believes recent inflation numbers are transitory and will ease as supply chain bottlenecks resolve. At present, the market is expecting the Fed to raise rates twice in 2023; accordingly, the risk is that inflation does not prove transient and the Fed hikes rates during 2022. Nevertheless, modestly higher rates are unlikely to unhinge the financial markets so long as economic growth remains strong.