Dear friends and valued clients,
The bull market continues, with the S&P 500 Index now up seven months in a row. Stocks have impressively gained 20% year-to-date, with the S&P 500 making 53 new all time highs before the end of August – another new record. All of this has happened with very little volatility, as the S&P 500 hasn’t had so much as a 5% pullback since last October.
We came into this year expecting a stronger economy and robust stock market, but even we were surprised at just how resilient things have been. Earnings help drive long term stock gains, and what we’ve seen from earnings so far in 2021 is a big reason stock returns have been so impressive. A record breaking second quarter earnings season saw more than 86% of S&P 500 companies beat their consensus earnings estimates, which is the highest ever recorded and well above the 75% five year average. S&P earnings are now 26% above pre-COVID-19 levels based on the 2021 consensus estimate, helping to justify stocks at current levels.
Another reason stocks have been so strong is Federal Reserve (Fed) monetary policies. The Fed is expected to begin to taper its monthly bond purchases (currently $120 billion), but it appears to be committed to leaving rates low for the foreseeable future. The Fed likely won’t consider increasing rates until the employment picture improves significantly, and it will be leery of quickly removing stimulus after the deepest recession of our lifetimes, especially if COVID-19 is still influencing consumer behavior. We believe this historic Fed accommodation will continue to be a tailwind for equities.
Worries are adding up though, even as stocks hit new highs: Supply chain disruptions are contributing to higher input prices in select industries; There are concerns about the future of Afghanistan; The Delta variant has nearly 100,000 Americans nationwide currently hospitalized; And China’s regulatory crackdowns could lead to further bouts of volatility. As a result, domestic consumer confidence has taken a hit recently, which could lead to a weaker than expected third quarter for the U.S. economy. However, if Delta concerns ease, any consumption that is lost in Q3 will likely be made up in Q4.
Additionally, late summer through early fall has been a seasonally volatile period for stocks historically. Although stocks shook off the traditionally weak August, September is upon us, and this month is historically the worst of the year for stock returns. Not to mention, October is historically the most volatile of the year for stocks. Also, the second year of a bull market has historically seen stocks pull back after big gains in year one. All that to say, an uptick in volatility over the next few weeks would not be abnormal, nor should it be worrisome.
Looking ahead to the final four months of the year, we remain positive on stocks and the U.S. economy. However, stocks haven’t pulled back 5% for nearly a year, and we believe investors should be on alert for potential seasonal volatility, aiming to use it as an opportunity when stocks go on sale. They say that the only market where everyone runs out screaming when things go on sale is the stock market. It’s important to have a plan in place when that sale comes along.
As always, please contact us with any questions.
Dave Schaper, CRPC®, AWMA®
President / LPL Wealth Advisor
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of September 1, 2021.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
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