Market developments may not be top of mind these days. After all, the economy is finally reopening and summer is now officially upon us. We take the opportunity below to reflect on the current backdrop and market narrative which we expect to persist into the back half of 2021. There are risks that need to be acknowledged, but the outlook remains constructive.
The U.S. economic backdrop should remain relatively strong through the course of the rest of the year, driven in particular by the services sector. While the world’s largest economy may see its economic momentum fade at the margin through the second half, it should remain above average. And that is supportive for global equities, which have historically done well in the absence of a U.S. recession.
There is some concern that monetary policy may be on the verge of change. Historically, rising interest rates eventually restricted the ability of some consumers, households, and businesses to access credit. Those tighter financial conditions have typically resulted in slower economic growth and in some cases, outright recessions. So it is understandable that investors are worried. But the withdrawal of monetary stimulus should be very gradual in nature, and take years to develop. We believe the current environment of favourable financial conditions should remain in place for some time to come.
Outside the U.S., the growth outlook has more recently started to improve with a reopening of economies in places like Canada and Europe. This should support the consensus view that global earnings will continue to grow at a double digit pace, helping meet the lofty market expectations that exist.
The predominant risk in most of the world remains the same as it has been for some time: Covid-19. The delta variant is rapidly becoming the dominant strain in many parts of the world. Infection trends are currently most problematic on the other side of the world. Countries such as Indonesia, Malaysia, Thailand, Russia and South Africa are dealing with worrying trends. Even Australia has implemented new restrictions. Israel, which has among the highest vaccination rates, has started to see rising infections, although the severity appears to be low as a result of its vaccine rollout. It is a reminder that the pandemic remains a key risk to the future growth trajectory.
The potential for sustained inflationary pressure has also emerged as a concern this year. And it may remain a source of risk until more evidence emerges that clarifies whether pricing pressures are simply being driven by a combination of supply chain bottlenecks and the reopening phenomenon, or factors that are more durable in nature. It will take some time to gain that level of clarity.
Many developed global equity markets have done quite well year-to-date and are sitting near all-time highs. And while valuations are above average for many, the backdrop of robust growth, double digit earnings gains, and favourable financial conditions remains supportive for stock prices. We are also encouraged by the depth of the global market’s gains this year. More specifically, the strength has not just been tied to one or two groups of stocks, but rather a relatively wide range of sectors and areas which is a sign of a reasonably healthy market advance.
As always, we will monitor development closely and provide thoughts on anything noteworthy. We wish you a healthy, safe, and enjoyable summer.
Market Decline and Recovery Results
The peak-to-trough numbers for the COVID-19 market decline and subsequent recovery are provided in the table below, as of today’s closing prices.