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Capital Market Outlook Third Quarter Update

With nearly 40 record highs posted by the S&P 500 this year, it’s hard to find a large group of analysts or investors who are feeling anything other than worried and fearful of what that means for market performance for the rest of the year and beyond.

Welcome to the stock market of 2021! The market blasted off to a resoundingly solid start to the year in the 13th best six-month starts in market history!* Yet, despite that success, market participants are worried. Let’s take some time to pour over the biggest concerns and what the data says about each. As I always say in our market outlook – we let the data guide us to make decisions about client investment portfolios.

This is the best chart to breakdown how many parts of the market performed in the first six months of the year and since the COVID bottom:

Inflation Concerns

The focus suddenly turned squarely on the Federal Reserve as they shrugged off unexpectedly higher inflation figures and attempted to calm the markets by indicating the transitory or short-term nature of the swiftly increasing barometer of our country’s prices. Clients are asking many questions about higher prices while wondering how long the impact will last. The ultimate fear is that inflation will run away higher. So far, we haven’t seen inflation surge higher in a sustained fashion.

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Yes, we can acknowledge that. Inflation appears to show signs of being short-term in nature for the time being. However, if these high inflation numbers persist, it can lead to sharply higher wages to an extent where it could impact profit margins for businesses and cut into companies’ ability to earn profits for shareholders – not great for stocks, should that occur. Yet the latest labor reports indicate more than 9,000,000 available jobs, so we don’t see that worst-case inflation scenario panning out. We do see the data suggests that inflation numbers are short-term due to supply constraints from COVID, low inventories, and backlogs as the biggest contributors at this time.

But if we do have high inflation, can the stock market still rise?

Well, let’s see what the historical data suggests. It largely indicates – yes. The market could and should go up with inflation. The key is a “moderate amount” of inflation. Persistently high or runaway inflation would be a different story. But at the moment, that is not what we believe is happening.

Reduced Government Spending will hurt the US Economy

It’s no surprise to clients that increased government spending helped make the shortest recession on record, with the last one generating a two-month life span. A quick recession, a stock market surge with a sizzling trajectory that seared into place several years ago lead some to wonder if the rug will be pulled out from under the stock market and economic recovery without massive government intervention. Some point to data like the chart below that indicates a reduced government influence compared to the massive injections delivered post-COVID. We believe that even with reduced government intervention, our market can continue to roll forward. We use historical context to validate that the stock market and economic growth are not always tied to government spending. Instead of government spending, we are going to lean on good old-fashioned corporate earnings. Thankfully, corporate earnings look favorable right now. We’ll have to wait and see if they continue to deliver in the coming quarters!

Are there enough positive economic signals out there to indicate that the market is on solid footing?

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As the below chart from Strategas shows, we agree the broad U.S. economy shows we do have more economic items that are either positive or favorable at the moment than negatives.  As we see the economic data points turn, stay tuned to our outlook and emails for adjustments to client portfolios.

Michael Carlin, AIF®, is the President and Founder of Henry+Horne Wealth Management. He can be reached at (480) 483-3489 or MichaelC@hh-wm.com.

Copyright © 2021 Henry+Horne Wealth Management

7098 E. Cochise Road, Suite 222 Scottsdale, AZ 85253

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