MARKETS AND INVESTING
July 05, 2021
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
The first half of 2021 is in the books with the S&P 500 up 14.4%, and trading at new record highs. This was the fifth consecutive positive quarter since Q1 2020's historic collapse (amidst the COVID shutdown)- with the S&P 500 now up 66% over that timeframe and 27% above its pre-pandemic highs. We would refrain from making too much of it because each period is different and returns can be highly variable, but positive second half returns have followed similar low double-digit first half returns over the past 40 years. That said, we would not be surprised for the rate of market ascent and volatility to normalize in the back half of this year, as is typical in year two of a bull market. 5.7% is the largest pullback witnessed for the S&P 500 year-to-date, and we remind you that 7-12% pullbacks are very normal (and can be healthy) historically within non-bear market years. Although we expect a moderation in returns moving forward and would be cognizant that drawdowns happen, we recommend using those periods as buying opportunities (as they enhance upside to our targets in the outlook).
With the breakout to new highs, market breadth is not overly impressive at the moment. Less than 50% of S&P 500 stocks are trading above their 50-day moving average (despite the index at highs), and 29% of S&P 500 stocks are actually down over 10% from their 52-week highs. Narrowing breadth can indicate some weakness to market momentum, and makes the broader index more susceptible to normal pullbacks. However, this is not overly concerning in our opinion, given the solid intermediate term backdrop (~90% of stocks above their 200 DMA), and also reflects the very rotational market taking place beneath the surface.
Interest rate movements in the first half of 2021 have been a large influence on sector and style rotation. In fact, the 20-day rolling correlation between Growth and Value is negative right now (very abnormal historically, as stocks typically move in the same direction). Growth has sharply recovered over the past month, resulting in fairly even year-to-date returns between the two styles (13.9% for Growth, 15.0% for Value). Our bias remains toward Value in the back half of the year given our positive view on the economic and fundamental trajectory, along with the likelihood of interest rates ultimately moving higher over the coming months. Value is currently testing its relative strength uptrend; and while it is difficult to determine how long the current moderation in interest rates will play out in the short term, we recommend accumulating Value.
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