As we closed the books last week on the first half of 2021, we ponder what will be in store for the next six months. Markets were substantially higher the first two quarters and barely looked back. Volatility was a factor only modestly, but those few jolts of "coffee" were great opportunities to get on board to buy stocks.
One of the many worries market players had (and still have) is the potential for long-run inflation. This has been mentioned numerous times as a potential market-killer. But two things happened that convinced us this may be a temporary situation. The Fed, led by Chair Jerome Powell repeatedly said any pop in inflation will likely be transitory. He better be right, because the huge moves up in several commodities had many doubting the Fed.
Second, the bond market has not been buying the higher inflation story. How do we know this? Yields on the 10 year bond nearly double from .90% to roughly 1.75% in three short months. That pace could be considered an explosion, but frankly the levels we are talking about are negligible. Remember, the 10 year bond was up near 3% in 2018.
Indicators are strong for the market indexes right now. That can change, of course, but for now the arrows are pointing upward. June was another up month for the S&P 500, it's sixth in a row. That's not unprecedented, though, this happened in 2017 when markets were up every single month of the year.
The indexes are up strongly, as mentioned earlier. The S&P 500, the industrials, Nasdaq and the Russell 2000 are all up double-digits for the year. That's truly impressive after being up strong in 2020 and dealing with a pandemic that nearly crippled the U.S. economy. We saw the leadership baton get passed around from month-to-month, but who will lead the back half of the year?
We think the infrastructure bill, if passed in Washington, will be a huge benefit to industrial names like Caterpillar ( CAT) , Deere ( DE) and Vulcan Materials ( VMC) . Defense and aerospace might also get a chunk of the spending, while we look for consumer areas like retail, restaurants and dining and travel to pick up the pace as state economies continue to open up.
Regardless of the history, it's always prudent to take it slow and easy. The markets can deliver some nice gains, but it can also deliver some awful pain. Stay within yourself, choose wisely, leave your ego at the door, use protection (put options are easy to use) and have high cash levels. You'll be on your way to a strong second half of 2021.
