2021 has been a very strong year for both stocks and the economy, but that does not mean there have not been some surprises.
Surprise 1: Interest rates rising & falling
While some expected interest rates to increase this year, the strength of the move higher in the first quarter of 2021 was a surprise. But reversing course and steadily falling since March may be a bigger one. Although we are still higher than where we began the year, the recent decline is what is on investor’s minds.
Surprise 2: Stocks have been strong and calm
After gaining 16% last year and 29% in 2019, the S&P 500 Index is up more than 17% so far this year. Even more surprising though is the lack of volatility seen so far.
Historically, year two of a bull market can be choppy and quite frustrating. After the huge gains we saw the last nine months of 2020, we entered 2021 expecting there to be more give and take than we have seen this year. The S&P 500 has not even had a 5% pullback since October 2020, one of the longest streaks ever.
After more than a 90% rally off the March 2020 bear market bottom (and near double on a total return basis) the odds are much higher of a standard 5-8% pullback during the historically troublesome August/September/October period. This would not be a bad thing, though, as some type of break could be necessary before another move higher.
Surprise 3: President Biden has been tough on China
In the aftermath of President Biden’s victory, political pundits immediately began forecasting friendlier relations with China than had been experienced under the Trump administration. The logic was straightforward. Foreign policy is one area where a president can act relatively unilaterally, and under the Obama administration, then-Vice President Biden played a crucial role in America’s policy of ‘engagement’ with China and reportedly had a warm personal relationship with President Xi Jinping.
So, what happened? Since then, China has grown bolder in its ambitions to become the dominant global player, continuing unfair trade practices and intellectual property theft to help fuel its rise. President Biden seems determined to follow through on President Trump’s more hardline approach, maintaining the Trump tariffs on China, calling out China for human rights abuses, demanding a global investigation into the origins of COVID-19, and perhaps most importantly building a coalition of European allies to confront China on its trade practices and its increasingly aggressive foreign policy. Whereas President Trump took a more ‘on our own’ stance toward China, President Biden is building a coalition allied against China.
The more hardline approach may be particularly important during this period of significant technological infrastructure buildout, such as 5G internet, which may set the technological rules of the road for decades to come. Frosty relations with China look to be one feature of the prior US administration that is here to stay.
Surprise 4: Crude Oil soared
A Democratic sweep in the 2020 elections brought with it expectations for swift climate action, and, some thought, likely much lower oil prices. It may seem a bit counterintuitive that oil prices and its investors have benefitted greatly since then, with crude oil starting the year at less than $50 a barrel but currently flirting with $70 a barrel.
The macroeconomic backdrop has played a large part. Coming out of the 2020 recession, risk assets, including oil, rallied strongly. While an unprecedented fiscal response was enacted to rescue the economy, investments tied to a reflationary environment, such as crude oil, saw outsized gains. The resulting ballooning deficit paired with a “risk on” market environment has seen the US dollar decline since the market bottom in March 2020, buoying most commodities.
But there have also been some specific policy actions that have propped up oil. Political analysts expected a swift resumption of the Obama-era Iran nuclear deal, which would have paved the road for Iranian crude to come back to market. This has yet to occur, limiting global supply relative to prior expectations.
Meanwhile, at home, President Biden has sought to restrict US oil production, lowering supply and boosting prices. Finally, OPEC+ has so far cooperated with one another, cautiously increasing supply and (narrowly) avoiding the breakdowns in negotiations that have led to supply gluts and lower crude prices in the past.
Surprise 5: Growth is not dead
The first half of the year has made it clear that rumors of growth’s demise are greatly exaggerated. A balance of both styles, with a modest tilt toward value, will be important for diversified investors over the historically volatile next few months.
Surprise 6: Blowout earnings
Coming out of lockdowns last summer, the pace of the economic recovery has been surprising. Just as surprising was how well corporate America managed through the pandemic, putting the powerful earnings rebound near the top of our list of biggest surprises this year.
When 2021 began, the consensus estimate for S&P 500 Index earnings per share (EPS) was $167. Today that number is about 14% higher at over $190 (Source: FactSet). This is impressive on its own. But considering estimates have historically fallen by an average of about 10% during calendar years, it is even more impressive.
Companies have simply blown away expectations, having delivered some of the biggest quarterly upside surprises ever recorded. The pandemic disrupted supply chains, bringing shortages of key materials and labor. Input cost pressures from a variety of sources weighed on profit margins. Yet, despite these challenges, in 2021 S&P 500 companies are on track to exceed the pre-pandemic peak in earnings by more than 20%.
Conclusion
There are always going to be surprises when it comes to investing, and 2021 is no different than any other year. What could the rest of 2021 hold? There will be more surprises for sure.
The views expressed are provided for information only and are not to be used or considered as an offer or solicitation to buy or sell securities or investment products. To determine which investment(s) may be appropriate for you consult your financial advisor.
- The economic forecast set forth in this presentation may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.
- Data provided by LPL Financial and FastSet.
- 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.