We’re talking about the first half of the year and not a football match! We’ve had highs and lows, lockdown lifting delays, comings and goings in government, and much more! Despite this, optimism about the market was fairly positive from the start of the year. In this blog post, Adrian Lowcock reviews what happened in the first half of 2021 and and what might lie ahead in the second.
The value rally that started following vaccine news took a breather in the first two months when the UK and Europe were forced to lock down again. But towards the end of February, just as the UK announced its exit strategy, value stocks rallied again and continued to perform until flattening out over May and June. Meanwhile, growth stocks were more volatile but overall posted respectable returns.
In terms of markets, the FTSE All Share was the best performing market (in sterling terms). It’s been a while since the UK markets were leading the performance charts and this was due to a combination of factors. Firstly, the UK market has a very strong value bias, but is also packed full of cyclical companies which were revalued as investor focus shifted to the recovery trade.
Hot retail money
In the US, the effects of stimulus cheques and lockdown boredom spread to markets when a group of retail investors launched a campaign against hedge funds that had shorted Gamestop shares. The focused buying caused the share price to rocket and forced hedge funds to close their positions.
That was the start of the ‘meme’ stock phenomenon as some investors chased specific stocks based on online chat room and social media discussions. The impact on markets is likely to be long lasting; another meme stock, cinema chain AMC, was able to raise cheap capital on the back of higher share prices, giving it an advantage over its competitors. Passive funds such as index trackers or ETFs can end up having to hold more ‘meme’ stocks because of rising share prices.
This is part of a wider trend, the extra cash from US stimulus cheques probably fuelling the rise in both cryptocurrencies and some high-profile technology stocks such as Tesla. Both have rocketed since the pandemic, and are now some way off their all-time highs. But as lockdowns ease and people return to work and life to normal, this hot money might flow out of the system.
Hot government money
Before his election, Biden had been promising to implement a huge fiscal stimulus programme in the US. The announcement of the $1.9trn package was well flagged and had little impact on markets. However, the subsequent news that there would be an additional US$2trn spending to go on infrastructure caused investors to reassess their views. Energy, industrials and financials performed well, as they should benefit from the additional stimulus, while technology and consumer staples lagged.
A combination of economic recovery and the announcement of the stimulus package from the US both supported commodity prices. Even a ‘green’ recovery needs the raw materials. Commodities were amongst the best performers in January as accelerating vaccination programmes boosted hopes of a return to normal in 2021. The recovery continued through February with Copper prices, often a bellwether for the global economy, doing well.
A strong recovery combined with record levels of stimulus and investment into infrastructure, not just in the US, but globally could result in strong economic growth. This has led many to suggest we could be entering a period of strong economic growth – a new Roaring 20s — and the start of a new commodity super-cycle. However, nothing goes up in a straight line and in May the performance of commodity prices slowed as fears of growing inflation returned.
The return of inflation?
The hopes of a roaring 20s style recovery led to fears that a strong recovery would lead to higher inflation and interest rates rising faster in the US than first anticipated. Inflation was widely expected to rise in the second quarter of 2021, as last year’s low oil prices in particular drop dropped out of the calculations.
But the outlook for inflation remains mixed. Some believe the additional stimulus programmes will overheat the economies, which are recovering quickly on their own and lead to higher inflation. Others see inflation as a temporary blip and point to the fact the US Federal Reserve is monitoring things very closely, and will step into cool things down.
The Fed is watching, but in April it said it was comfortable to let inflation run over its target. The following month, an inflation figure of 4.2% (for April) caused some officials to comment on the need to consider tapering if the economy continued its strong recovery, and in June the Fed confirmed that interest rates may rise in 2023, but not 2024 as initially indicated.
Whatever your view on inflation, the strength of the economic recovery and interest rate expectations are affecting markets and look likely to continue to do so. As the US and Global economies reopen, economic data is being watched very closely and investors are responding accordingly — but sometimes overreacting to limited information.
Overall, the first half of 2021 has been a busy one and whilst the focus has been on the end of the pandemic it has been a strong period for investors with healthy returns across global equity markets as the recovery continued and companies adapted.