What may fuel growth in the second half of 2021?

Building under construction with roof open to the sky

The economy and markets grew at a rapid clip in the first half of 2021. Darrell Cronk offers his view on whether such growth is sustainable.

Darrell L. Cronk, CFA, President, Wells Fargo Investment Institute, Chief Investment Officer, Wealth and Investment Management
Darrell L. Cronk, CFA
President, Wells Fargo Investment Institute
Chief Investment Officer, Wealth and Investment Management

In the second half of 2020, the streets of my adopted home town of New York were still eerily silent, and not since 9/11 have the skies been so empty. One year on and what a difference! Flights are full again and even subway rides are moving towards normal.

The uptick in vaccinations has helped drive economic growth in both the U.S. and China and is finally helping the other advanced economies. It also has been fueled by a heady mix of private savings, low interest rates and the “visible hand” of multiple government support programs.

The singular feature of this market environment is the powerful macroeconomic mosaic at work.

This potent combination is charging up a recovery that is anticipated will intensify to the fastest two-year pace we’ve seen since 1965-1966. I can safely say that I have never seen the economy running hotter in my lifetime.

Some of the key first-half indicators of the strength of the economy include:

  • Record corporate bond issuance
  • S&P 500 Index value stocks outperforming growth
  • Base metals and agricultural products posting decades-high prices
  • Earnings running to catch up with valuations

But such strong growth can have a downside. We know that we need to pay careful attention to  potential rates issues in the second half of the year, specifically taxes, inflation, and interest rates. We expect all three to rise through the back half of 2021:

  • The Biden administration has signaled its intent on taxes
  • Prices are increasing as demand is outstripping supply in many industries
  • Higher interest rates may be next, as they recover from the extreme lows we saw at the height of the pandemic to nearer to historical averages

All three could eventually dampen the recovery, but at this early stage the singular feature of this market environment is the powerful macroeconomic mosaic at work with a steadily weakening U.S. Dollar, rising commodity prices, strong global equity returns, falling equity and bond volatility, low interest rates and a robust fiscal stimulus push.

Nonetheless, we suggest exercising caution around the fringes of asset markets. Market price distortions call for special attention to possible risk and reward when market sentiment boils over. Portfolio diversification and a disciplined plan to allocate cash can be valuable allies in this type of market environment.

I recommend reading our Midyear Outlook report for additional detail on the potential opportunities and what to consider in managing downside participation fueled by these extraordinary times.


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