The lack of gravity is one of NASA’s top five risks of human space travel. However, as the power of severe fiscal stimulus, designed to bring the US economy through the pandemic, begins to fade, gravity has reappeared as a threat for soaring US equities, bond prices, and other financial assets.
Following a strong first half, the second half of 2021 may see a slower pace of economic growth and a return to more normal inflation rates. According to investors and analysts who spoke with MarketWatch about what to expect in the second half of the year as the dust settles with the American economy recovering and trillions of dollars worth of Washington fiscal stimulus fading into the background, a little more grounding wouldn’t be entirely bad for financial markets. “It’s extremely probable that we’ve seen peak everything,” said Giorgio Caputo, head of J O Hambro Capital Management’s multi-asset division. “However, that does not rule out the possibility of further strong growth in the recovery.” Caputo anticipates U.S. economic growth will drop in the second half of the year, similar to the pace of “revenge travel,” especially considering the raging 8.2% annualized growth projected for GDP in the second quarter. “In terms of GDP numbers, it will be difficult to match what the second quarter of 2021 is likely to look like, compared to the second quarter of 2020, when the entire world was shut down,” Caputo stated. “But you still have a very supportive monetary policy, and it will remain for a long time.” A high vantage point According to Dow Jones Market Data, the major U.S. stock indexes closed the first week of the third quarter at all-time highs, with the S&P 500 SPX, +0.75 percent posting the best five quarters of percentage gains since the second quarter of 1936. Even as investors battle with among of the lowest yields of the post-2008 financial crisis era, supply of US corporate bonds LQD, +0.28 percent — and even demand in the lethargic municipal-bond market — has climbed during the past 15 months. According to BofA Global analysts, issuance of investment-grade corporate bonds in the United States reached $860 billion in the first half of this year, the second-highest total ever following last year’s $1.2 trillion surge. In a weekly letter, the BofA team said, “Companies still hold significant cash war chests accumulated last year.” “On the other hand, demand creates supply, and historically low yields and spreads at post-crisis tights may draw opportunistic issuance.” Companies in the United States aren’t the only ones with excess pandemic cash. As households squirreled away extra government handouts, the rate of personal saving in the United States fell to a still-high 12.4 percent in May from its all-time high of 33.7 percent in April 2020. Unleashing that wealth could help to keep the economy growing this year. Nonetheless, the bond market has been suggesting probable difficulties for the US economy in terms of the Federal Reserve meeting its 2 percent inflation target in the long run, with the 10-year Treasury yield TMUBMUSD10Y, 1.436 percent at 1.434 percent on Friday, its lowest level since March 2. Read more about what the 10-year Treasury rate’s drop below 1.5 percent could mean for inflation. “That has sparked some interest in growth stocks,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management, referring to the possibility that Fed support will be difficult to withdraw if the economy continues to struggle. The S&P 500 finished the week up 1.7 percent, giving it a 15.9% year-to-date gain, while its growth category gained 1.6 percent and 14.3 percent, respectively. The Dow gained 1% this week, putting it at 13.7 percent for the year, while the Nasdaq Composite gained 1.9 percent this week and 13.6 percent for the year. Returning to Earth According to this chart from Columbia Threadneedle, daily life in the United States has already returned to 80 percent of “normal,” which includes domestic travel, the return to offices and schools, as well as brick-and-mortar shopping and dining out.
How is the “return to normal” going?
Threadneedle Columbia
Friday’s robust jobs report indicated that the U.S. labor market continued to recover in June, albeit at a rate that could take more than a year to return to pre-COVID levels. When it comes to when the Fed might adjust its easy-money policies, “what the Fed cleverly done is move the onus to the jobs market away from inflation,” said George Goncalves, head of U.S. macro strategy at MUFG Securities Americas. “If we are performing a handoff, getting back to normal business activity, not only relying on stimulus,” he told MarketWatch, “then companies must recruit and put more people back to work.” “It’s quite important.” However, due to the July 4th vacation in the United States and markets closing on Monday, next week will be a short week. However, both IHS Markit and ISM will provide updates on service sector activity in June on Tuesday, followed by May job openings data and minutes from the Fed’s most recent Federal Open Market Committee on Wednesday. “We have our eyes wide open,” said Caputo of J O Hambro, adding that European SXXP, +0.26 percent markets could yet surge higher, given the region’s earlier stage of recovery than the United States and the region’s ratification last week of comprehensive climate legislation known as the European Green Deal. “The crisis drew Europe closer together.”/n
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