As U.S. stocks are about to end the first half of 2021 with double-digit gains, trading enthusiasm on Wall Street can be said to be on the rise, and many strategists have also predicted that it will be driven by strong corporate earnings and economic growth. , US stocks are expected to rise further in the second half of the year.
The S&P 500 Index hit a record high for the fourth consecutive trading day on Tuesday, which is also the 33rd record closing high set by the index during the year. After only half a year, the number of new highs in the S&P 500 Index has been the same as that of 2020.
“Strong growth, strong yields, persistently low interest rates, a hypnotized bond market.” Ethan Harris, head of global economic research at Bank of America, said. “Fed Chairman Powell has done a good job of smoothing out the volatility of the bond market, so it is now the blonde girl period of the stock market.”
Judging from the gains during the year, thanks to the ultra-loose monetary policy, the recovery of the US economy and strong corporate profits, the S&P 500 index has risen sharply by nearly 14% so far this year. According to the statistics of LPL, when the S&P 500 index rose more than 12% in the first half of the history, its performance in the second half of the year was often stronger than in normal years—the average increase could reach 7.1% and the median increase Can reach 9.7%.
However, although the probability of US stocks maintaining an upward trend in the second half of the year is not small, it may also be quite difficult to want to be as strong as the first half of the year. Many Wall Street strategists mentioned the following two major risks that the market may face in the second half of the year:
The first to bear the brunt is undoubtedly the Fed’s policy shift. Some people in the industry worry that once the Fed starts discussing plans to slow down bond purchases in the second half of the year, the market may fall into turmoil as a result. The reduction of QE is seen as the first step for the Fed to withdraw from the extraordinary easing policy implemented during the epidemic. Although the specific timetable is not yet clear, many Fed observers expect that the Fed will start discussing this issue at the Jackson Hole seminar at the end of August.
The second risk is also related to the Fed-that is, the worry that the current high inflation data will not be as fleeting as Fed officials expected, and rising prices may become a bigger problem for the US economy. What is more worrying is that the higher-than-expected rise in inflation data is also expected to accelerate the Fed’s interest rate hikes. The current mainstream expectation of Fed officials is that interest rate hikes will begin in 2023.
The most critical point in the second half of the year: September
In the eyes of many industry insiders, the most critical month for the US financial market in the second half of the year may be September. This is not only because the Federal Reserve, which has just concluded the Jackson Hole Global Central Bank Annual Meeting, may have entered a period of policy change; at the same time, the extended unemployment benefits in the United States will also end that month, and the performance of economic data around this period will be particularly affected. Eye-catching.
Bank of America’s Harris pointed out that the economy still needs to continue to show signs of improvement within a few months, whether in the labor market, or in terms of supply shortages and bottlenecks. Recent employment growth has been strong, but not as strong as expected because employers are still complaining about labor shortages.
“It’s a bit like you already have a free summer pass. The market is accepting any data, whether it’s core inflation, salary or job vacancies. And September will be a crucial month for everyone. If there is not yet When you start to improve, it will no longer be a blonde girl scene,” Harris said.
For many Americans, September will be the day when the previously extended unemployment benefits will finally expire. At the same time, children will return to school, and parents will be free to return to the workplace. From a logical point of view, the labor shortage of many American companies is expected to be alleviated by then.
In addition, another important factor affecting the global market in the second half of the year will still be the evolution of the epidemic. The recent spread of Delta mutant strains has caused economic stagnation in many parts of the world, especially in Asia. However, most people are not so worried about the epidemic right now.
Peter Boockvar, chief investment officer of Bleakley Global Advisory, said, “The market does not currently care about mutant viruses because we know that as long as the more vaccinations we get, the better we can deal with it.”
The fatal “Kryptonite” of US stocks: inflation
In contrast, Boockvar believes that the market is more concerned about inflation and how global central banks will respond.
Just as the “Kryptonite Stone” in the DC superhero movie is Superman’s nemesis, it seems that inflation performance will also become the fate of US stocks. Boockvar pointed out, “For me, inflation is the kryptonite of the market. The question is whether we can get rid of it, or how to deal with it when we see inflation data continue to be hot. If you start to see August and September Data from October and October still show that inflation remains high, so the Fed may have no choice but to start reducing the scale of bond purchases by then.”
According to data released earlier this month, the U.S. CPI rose sharply by 5% year-on-year in May, officially entering the “five era”. This was the largest increase since oil prices soared in 2008, and was well above the Federal Reserve’s 2% average inflation target. .
At present, the reason why US stocks can continue to rise in a high-inflation environment is that investors expect more than 40% of profit growth this year, and they also believe what the Fed said: the rise in inflation is only temporary. So far, many companies have been able to pass on their higher costs to customers. However, when all this is difficult to eliminate, investors will undoubtedly begin to worry about a sharp drop in profits.
Scott Wren, senior global strategist at Wells Fargo Investment Institute, said, “At the moment people are still not worried that inflation will take root for a long time. This is quite surprising to me because we can already see a lot of high inflation data. But the market still hasn’t seen much turbulence. If you look at the 10-year U.S. Treasury yield and where the stock market is currently, you know that the market has not yet begun to pay for long-term inflation.”
The benchmark 10-year U.S. Treasury yield was reported at 1.48% on Tuesday, and is still well below the high of 1.775% in March. Bond yields are inversely proportional to prices, so investors have been buying bonds and stocks at the same time. Harris pointed out, “What really worries the market is whether there is more evidence that inflation will continue. If so, the Fed can talk about austerity as much as it wants, and everyone knows that they must start as soon as possible.”
Of course, even if the Fed starts to slow down its bond purchases in the second half of the year, the stock market may still rise. Wren said, “I think the pressure within the Fed has actually been increasing. When Powell and his closest colleagues tried to postpone the launch date as much as possible, about half of the committee members were ready to take action. From a market perspective. Seen, this is not a real big risk for the Fed. Everyone knows that they must reduce the scale of bond purchases at some point… The big event is that the Fed will eventually raise interest rates.”
Reprint indicated source：Spark Global Limited information