The first half of 2021 comes to an end here on Wednesday. It has been a solid year so far, with the S&P 500 gaining about 15%, including dividends, but there are some wide variations in sectors and stocks that have presented both obstacles and opportunities. A number of key themes have shaped the market action and they are likely to persist as we continue to move past the COVID pandemic and return to normal.
The major market themes in 2021 are all related to some degree, and they all have offered some interesting trading for market participants who are cognizant of the big pictures and have focused on staying opportunistic.
The major themes have been:
- Rotational action. The most dominant theme so far this year has been rotation not only between traditional groups such as growth and value but between reopening-the-economy names and stay-at-home names. There has been a particularly aggressive rotation out of speculative sectors such as special purpose acquisition companies (SPACs), biotechnology, solar energy, cryptocurrencies and electric vehicles and into value names that are seen as benefiting from an economy in transition.
- Meme trading. Meme trading has received substantial attention in the press and is an interesting sideshow, but this is just a more enhanced form of trading that has always existed in some form. There have been consistent pockets of meme trading, and that impacts some of the speculative trading that occurs on a daily basis.
- Inflation and higher interest rates.The Fed is always the dominant market force, and its message has been shifting as the economy reopens and inflation becomes a concern. The market has been able to shake off some recent worries about inflation and higher rates, but this is a theme that is going to reoccur as we move ahead
- Shortages of labor and materials. One of the many drivers of the worries about inflation is that there have been persistent shortages not only of goods that are in short supply due to supply chain issues but also of labor. There is a big shift in the labor market and more companies than ever are struggling to find the help they need. This will shift as the pandemic benefits expire, but there is a social trend at work as well that will have an impact. Things such as housing, lumber, commodities and a wide range of products are still delayed due to unequal supply and demand, and this will shift in the months ahead
- Exceptional growth. The recovery from the pandemic has been uneven and there are still big concerns about a variant form of COVID, but this is an economy that wants to run. Shortages of labor and materials have helped to restrain growth and that is a big part of why inflation concerns have stayed contained. There will be many stocks with strong growth in the second half of the year.
Market participants are always looking for historical comparisons, but there aren't many cycles similar to what we have been through in the last 18 months. I have no idea what the future will hold, but I am confident there will be an endless supply of opportunities as we navigate the shifting themes.
We have mixed action again to start the day here on Wednesday and we will need to watch for pockets of weakness under the surface. There was poor action Tuesday that was not evident in the indices, and we will see to what degree that persists today.