Last week, we closed the books on the first half of 2021, so naturally we ponder who the market leaders will be for the next six months. Inflation will play a small role, but I fully expect that the momentum behind the markets, the massive infrastructure bill and consumer spending will be key players.
Inflation is a temporary blip
Market players were (and still are) worried about the potential for long-term inflation and its impact on the stock market. Two things have happened that convinced me inflation is temporary. First, The Fed, led by Chair Jerome Powell, have repeatedly said any pop in inflation will likely be transitory. Several commodities moved higher, which had many doubting the Fed.
Second, the bond market has not been buying the higher inflation story. Yields on the 10 year bond nearly doubled 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. (In 2018, the 10 year bond was sitting near 3%.)
These stocks will be market leaders
Markets moved substantially higher during the first two quarters of the year, and indicators continue to point upward. Volatility showed up here and there, but those few jolts were great opportunities to get on board. The SPX 500, Industrials, Nasdaq and Russell 2K are all up double digits for the year. That’s truly impressive, as it follows their strong comeback in 2020.
If the infrastructure bill passes in Washington, industrial names like Caterpillar, Deere and Vulcan Materials will reap the benefits. Defense and aerospace names might also get a boost, so keep your eyes trained on those names.
Much (but not all) of current inflation can be tied to consumers’ pent up demand for goods and services. I expect retail, restaurants, hospitality and travel names will also do well as we unleash our spending power over the summer.
Regardless of the optimistic outlook for the second half of 2021, it’s always prudent to take it slow and easy as a trader. The markets can deliver some nice gains, but it can also deliver some awful pain. Practice good risk management to ensure your portfolio will continue to have a strong year. Leave your ego at the door, buy index puts as protection and always keep plenty of cash on hand.
