2021 has been a historic year for the economy and stock market. Economic activity is recovering at a once-in-a-lifetime pace as businesses expand and consumers spend. Financial markets are grinding higher with many major indices generating double-digit returns year-to-date, despite shifts in sector leadership. Inflation, which has been subdued for decades, is heating up. The pandemic rages on in parts of the world but signs of recovery are spreading too. What can long-term investors learn from the past several months as they prepare for the second half of the year?
Indicators suggest the market is likely to remain bullish
If the best guidance for long-term investors last year was to focus on the light at the end of the tunnel, today the economy has already cleared the tunnel. In fact, it’s likely that in the second quarter US GDP broke through previous peaks reached in 2019. Many economic indicators, from manufacturing to retail spending, are at levels not seen in a generation.
This is even more true of the stock market which has been anticipating a full recovery since last year. S&P 500 earnings-per-share have returned to pre-pandemic peaks and are expected to grow at a breakneck pace over the next year. While valuations have been stretched to almost dot-com era levels, growing earnings could continue to keep the bull market healthy. Rising interest rates and commodity prices, while tricky for bonds and inflation, have helped a variety of equity sectors including financials, energy, and materials. This also adds to gains (and volatility) in areas such as technology and communication services.
Chart: The S&P 500 Index continues to reach new all-time highs supported by earnings that have returned to pre-pandemic levels.
Sources: Clearnomics, Standard & Poor’s, Refinitiv
Hiring may continue to ramp up
While the comparison to pre-pandemic levels is natural, the market is already looking further down the road. Consensus expectations are that the economy will hit a new gear as the economic cycle continues. The pent-up demand in spending on both goods and services could be met by a further ramp up in new hiring activity by businesses large and small. Amazingly, there are as many job openings in the US as there are unemployed individuals today.
Inflation could become a concern
One of the biggest investor concerns could continue to be inflation as new data periodically emerges. By some measures such as the core consumer price index, inflation is already the highest in three decades. And while price increases for consumers this year have been driven by the recovery and supply/demand disruptions, the Federal Reserve continues to keep monetary policy loose. What’s more, the government continues to increase spending, adding to the over $5 trillion in pandemic relief with new economic and infrastructure bills.
It’s a good idea to manage risk by diversifying your portfolio
Naturally, these concerns and others could occupy investors’ minds during the next phase of the business cycle. While the recession and recovery have been unusual by historical standards, there are reasons to believe maintaining a diversified portfolio is one of the most effective ways to help weather the 2021 market, even with the uncertainty of inflation and rising interest rates.
Stay the course in 2021 with a solid plan
As a long-term investor, one of your most important jobs is to make sure your investment mix carefully balances the need to manage risk with the need for potential gains. Check out MoneyLion’s personalized portfolios. They’re built and managed professionally to help keep you on track through any market ups and downs — with no asset-based management fees or minimums. Just pick the portfolio that lines up with your goals, preferences, and the amount of risk you’re willing to take on. We’ll do the rest.
Put your investing on autopilot
It’s a good idea to avoid moving your money in and out of the market to try and capture the performance highs and avoid the lows. It’s extremely risky, and even the most experienced investors get tripped up by it. Instead, consider setting up an automatic investing plan. That means investing a set dollar amount at regular intervals, regardless of market swings. It’s a nearly effortless way to consistently invest money for your goals. And in the end, you’ll end up buying the average price of an investment, which is exactly what you’d want to achieve in the long run. Remember, investing even small amounts can really add up over time.
This material, as well as the insights and data within, have been provided to MoneyLion by Clearnomics, Inc.
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