The S&P 500 rose 8.2% in Q2 and is up about 14.4% for the first half of 2021. Tech led the second quarter after a sluggish Q1. The tech heavy Nasdaq jumped 9.5% in the second quarter and sits up about 12.5% year to date. The more value biased Dow was up a milder 4.6% in the second quarter but now sits up 12.7% YTD. Overall, world markets performed great for the first six months with the MSCI World index advanced a solid 6.5% in 2Q21. This is a touch better than its 6.0% 1Q21 gain. Year to date, the world index is up 13.0% for the first 6 months of 2021.
The primary cause of the shifts in sector leadership in the second quarter was the long end of the interest rate market confusing most investors, rallying, and the 10s/2s yield curve rallying by over 35 basis points. The main move was a moderation in yields amid growing signs that supply constraints were acting to slow growth.
Commodity leadership broadly peaked during the early second quarter. Oil, gas, continued higher throughout the quarter and some crop prices jumped early in 2Q21. This allowed the CRB index to gain 15% in the quarter (well off its intra-quarter high), following a 10% 1Q21 gain.
Metals (Ex-Gold. Gold remains a dud asset class as an inflation hedge) generally stayed high but lost some ground late in the quarter on the global supply chain issues, China’s steps to slow demand, and quarter end inventory dumping. Even so, copper rose 7.6% in 2Q21, after a 13.5% 1Q21 rise. On the downside, lumber fell almost 30% (over 50% from its peak..timber!!!) following its historic run early in the year and is now down on a year-to-date basis. Gold and silver are also in that territory, even with a small rebound in Q2.
At the other end of the spectrum, oil is now topping commodities for the year, with a gain of more than 50%.
While mindful of normal summer seasonally in both the economy and stock markets making for a 5-6.5% pullback possible at any time, our view, as outlined in our recently released 2nd Half Market Outlook, the S&P 500 can end 2021 over 4600, with even higher targets feasible as volatility continues to trend much lower in 4q2021 and 1q2022. Risks to our outlook lie primarily in another upturn in virus counts this summer and in 1q22 that would cause an economic slowdown just as supply chain inventories are being rebuilt.
Last Fridays Podcast: Second Half Outlook Breakdown – Part Two: Federal Reserve
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