FIRST HALF IN THE BOOKS

The stock market opened the second half of 2021 with modest gains. At the moment, the Dow is up 72 points, and the S&P 500 is up .3%. Energy, utilities and real estate are leading the way with 1+% gains. Technology is the lone sector in the red this morning. Commodities are mostly higher today. WTI crude oil is closing in on $75/barrel, the highest in almost seven years. OPEC+ signaled it is ready to gradually increase oil production as the global economic recovery takes hold. The bond market is mixed in early trading. Treasuries and high-grade corpoorates are selling off, sending yields higher. Junk bonds are up modestly on some positive economic news (see below).

The first six months of the year produced broad gains across stock market sector groups. The chronically erratic energy sector surged 45% (after sinking about 34% in 2020). Banks and real estate investment trusts (REITs) shot up more than 20%. And the only sectors gaining less than 10% were utilities (+2%) and consumer staples (+3.5%). With the exception of utilities and energy, all other sectors are trading significantly higher than they were before the Covid Crisis. Wall Streeters remain optimistic for the second half. CNBC Contributor Jim Cramer quipped, “Don’t get bored with a rally…just because it’s quiet.” And yet, just as many are predicting a 5-10% correction in the near-term.

A recent CNBC survey called out rising inflation, covid resurgence, and Fed stimulus tapering as the biggest risks to capital markets. Josh Brown, CEO of Ritholtz Wealth Management, reminds us that while investing always carries risk, the stock market has been very resilient. Looking back at the past five years we’ve endured the 2016 election, Brexit, trade war, and the contested 2020 election with the market resolving to the upside each time. So he asks, should we be so worried about Fed tapering? The Fed should probably “lessen the emergency [stimulus] response” because we don’t need it anymore. The economy is on a good footing, so tapering could actually be a positive catalyst. As for inflation, General Mills (GIS) recently announced it expects cost of goods inflation to reach 7% this year (including packaging materials, transportation, manufacturing, raw materials). That said, inflation expectations—at least according to the TIPS market—seem to have peaked in May. And while prices for all types of goods and services are significantly higher than year-ago levels, it’s really the future rate of price acceleration that matters to capital markets. The big question is whether that rate will slow as global supply chains recover from the Covid Crisis.

The Institute for Supply Management’s US Manufacturing Index fell back a bit in June, but still suggests businesses are expanding at a very rapid rate. The index level dropped to 60.6 from 61.2 in the prior month, but those figures are typically associated with business cycle peaks. New orders fell back to 66.0 (from 67.0), but the rate of new orders is still outpacing production levels. Hiring activity stagnated, and prices paid (i.e. cost inflation) picked up to 92.1 (45-year high). Product delivery delays and order backlogs shrank, a sign that supply chain constraints are perhaps beginning to be repaired. Product inventories rose from extremely low levels. Manufacturers want to hire workers, but the supply of labor just isn’t there.