George Lucas, Raiz Group CEO
Given it’s nearly six months into the year, it’s an ideal time to look at what has transpired over the first half of 2021, and where we expect markets to end up at year end. Many investors continue to ask how far equity markets can run given gains since pandemic lows many months ago.
What has become evident is that monetary and fiscal support will continue a lot longer than investors initially expected, especially with the recent announcements of fiscal support from the US.
Also, we need to get ready for the likelihood of higher taxes, particularly as much of the fiscal support will, and already has, benefited the wealthy and large tech companies. On this point, the sooner that higher taxes are brought in the faster wealth distribution will be improved.
Another factor to consider is that investors continue to debate whether current inflation rises are transitory and if so how long they will last. Alternately, there’s the potential for upward pressures on prices to persist due to supply and demand issues created by the pandemic, which could lead to expectations of rising interest rates. If this is the case we could be in for a bumpy ride ahead.
Value and cyclical stocks are two big themes
We’ve also seen value and cyclical stocks benefit from their sensitivity to the improving economy, especially since November last year. This trend has assisted the Australian market which is not as heavily weighted towards growth stocks as the US market. In saying this, growth stocks did start to rally again in mid-May, narrowing the lead made by value stocks.
So, the question becomes whether cyclicals and value stocks can run further or if investors should look more at growth. This is a good question and while the answer is unclear at the moment, Raiz portfolios will benefit from both rallies in growth and value stocks.
We are at the start of a cycle and once the economy shifts into a mid-cycle phase, which is years away, quality shares will start outperforming. Quality shares have been underperforming recently.
Federal Reserve closely watching US recovery
Still on equity markets, the US Fed Reserve recently threw a spanner into the works and triggered selling when it signalled an expectation that interest rates will rise sooner than the market had previously expected. However, speeches from Fed officials in recent days have defused anxieties.
Also in Washington, US President Joe Biden has struck a deal on a $1 trillion infrastructure plan with the GOP negotiated by a group of Senate Republicans and Democrats . The deal encompasses the next eight years, so will not help markets that much in the short term for a continued rally.
Separately, there’s also a growing bipartisan political consensus on antitrust regarding large tech companies that change is needed and overdue. This looms as negative for large tech stocks.
In Europe, we are seeing the region emerge from the pandemic recession. The euro-zone composite PMI rose to a 15-year high in June, suggesting that its economy is rebounding as restrictions lift.
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