What to expect if the ‘peak of everything’ has already happened and the markets are feeling the force of gravity again

But gravity also emerged as a concern for the surge in US stocks, bond prices and other financial assets as the strength of an extreme fiscal stimulus, meant to push the US economy to the other side. pandemic, begins to subside.

After a breathtaking first half, the remainder of 2021 could be ripe for a slowdown in the economic expansion of the United States and a return to the rate of inflation on earth.

A little more anchoring wouldn’t be a bad thing for financial markets either, according to investors and analysts who spoke with MarketWatch about what to expect in the second half of the year, as the dust settles. with the recovery of the US economy and billions of dollars. Washington’s fiscal stimulus taking a back seat.

“It’s very possible that we’ve seen it all come to a head,” said Giorgio Caputo, multi-asset team manager at JO Hambro Capital Management. “But that doesn’t mean we can’t have very solid continued growth in the recovery.”

Similar to the pace of “revenge journeys”, Caputo expects US economic growth to accelerate at a more moderate pace in the second half of the year, especially given the forecast for annualized growth. of 8.2% of GDP in the second quarter.

“In terms of the number of GPDs, it will be difficult to have year-over-year growth rates that rival what the second quarter of 2021 should look like, compared to the second quarter of 2020, when the whole world has been shut down, ”Caputo said.

“But you still have an incredibly accommodating monetary policy, and will be for a long time.”

A high perch

Major US stock indices ended the first week of the third quarter at historic highs, after the S&P 500 SPX,
+ 0.75%
recorded the five best quarters of percentage gains since the second quarter of 1936, according to Dow Jones Market Data.

Supply of US corporate bonds LQD,
+ 0.28%
– and even demand in the dormant municipal bond market – has increased over the past 15 months, even as investors grapple with some of the leanest yields of the post-financial crisis era of 2008.

BofA Global analysts say the issuance of quality US corporate bonds reached $ 860 billion in the first half of the year, the second highest tally on record, after the $ 1.2 trillion boom from last year.

“Companies still have large cash war chests accumulated over the past year,” the BofA team wrote in a weekly note. “On the other hand, demand creates supply, and the combination of historically low yields and spreads during post-crisis tensions can attract opportunistic issues.”

It’s not just American businesses sitting on extra cash in the event of a pandemic. The personal savings rate in the United States has fallen to a still high 12.4% in May, against its highest ever recorded at 33.7% in April 2020, as households withdrew additional government assistance. Freeing up that money could support economic growth this year.

Nonetheless, the bond market signaled potential problems for the US economy, with the Federal Reserve hitting its longer-term 2% inflation target, with the 10-year Treasury yield TMUBMUSD10Y,
at 1.434% Friday, its lowest since March 2.

Lily: What the drop in the 10-year Treasury rate below 1.5% may say about inflation

“It is stimulating a certain desire for growth stocks,” said Robert Pavlik, senior portfolio manager, Dakota Wealth Management, thinking that Fed support might be harder to cut if the economy struggles. grow.

The S&P 500 ended the week up 1.7% and up 15.9% year-on-year so far, while its growth segment increased 1.6% and 14.3%, respectively. The Dow swept at 1% weekly gain, up 13.7% since January 1 and the Nasdaq Composite has propelled 1.9% higher for the week and 13.6% over the year.

Back on earth

Daily life in the United States has already returned to 80% “to normal” according to this graph from Columbia Threadneedle, which measures items that include domestic travel, return to offices and schools, as well as physical purchases and restaurants. .

How is the return to “normal” going

Columbia Threading Needle

Friday’s strong employment report also indicated a further recovery in the US labor market in June, but at a rate that could take more than a year for employment to return to pre-COVID levels.

“What the Fed has done smartly is shifting the blame to the job market rather than inflation,” said George Goncalves, head of US macro strategy at MUFG Securities Americas, referring to when the central bank could change its easy money policies.

“If we take a step forward, get back to normal business activity, not just based on stimulus, then companies need to hire and get more people back to work,” he told MarketWatch. “It’s super critical.”

Next week will be a short week, however, with the July 4th holiday in the US and markets closed on Monday. But there will be updates on service sector activity in June Tuesday from IHS Markit and ISM, followed by data on May job vacancies and minutes from the latest federal open committee. Fed market on Wednesday.

“We have our eyes wide open,” said Caputo at JO Hambro, adding that the European SXXP,
+ 0.26%
markets could push further higher, as the region remains at an earlier stage of recovery than the United States and with his approval last week to sweep away a climate law, nicknamed the European Green Deal.

“The crisis has brought Europe closer together.

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