Market Outlook for the second half of 2021

Written May 15th

Updated June 1st

Published June 15th, 2021

 

A look ahead to the second half of 2021:

 

First, I would like to thank all our clients and the community for supporting Aurora Strategic Advisors. In July, we will celebrate six years since we opened our doors. 

 

I still remember some people saying Lumberton didn’t need another “Financial Advisor” and a new investment firm would probably not succeed.  

 

Today, we serve over 325 individuals and businesses and employ five people. We are looking to add two more staff members this year and open a second office in the first half of 2022. I consider myself extremely blessed. 

 

 

An early disclosure. 

 

Aurora Strategic Advisors is a Registered Investment Advisory firm, and as a “fiduciary,” we must do what is best for our clients. Therefore, we must always put our client’s needs first because we make recommendations for stocks, mutual funds, bonds, Certificates of Deposits, insurance companies, annuities, and other investments.

 

Some firms and individuals that are not “fiduciaries” are not held to the same level of accountability by the SEC or the State of North Carolina.  

 

(Read that again. Know the difference.)

 

In the past, I created this report for clients only to give them a preview of what was ahead for the market. The goal of this report was to make new recommendations, changes, or deletions to a client’s portfolios, as well as a preview of what I see on a 6-month horizon.  

 

 

 

 

 

 

However, I have found the reports were shared with non-clients, so I modified the content with additional disclosures. 

 

Since I am not familiar with non-client portfolios or non-client investment risks, I would advise them to speak to a financial advisor or schedule a free consultation with our office (minimum assets required) before acting on anything in this report.

 

Should an investor act independently, consider your time horizon and investment risk level and do additional research to cover your due diligence. This report is not designed for day trading or short-time horizons. When I look at any trend, economy, or investment, I take a long-term view of our recommendations and the suitability of our clients.    

 

An early heads up, I know the word “inflation” is discussed in length in this out-look. That doesn’t mean that it is the end of the world. Even in times of inflation, I believe investors can do well

 

Considering how the first half of 2021 took us through plenty of highs and lows, I think clients are going to be happy to enter the second half. There will be times when the second half will be a grind and not a pretty straight-up line as we experienced in 2019 or 2020.   

 

However, before diving into the report, I would like to address meme stocks. Daily, I have received countless calls and questions about them and cryptocurrency and how people can get into them. I usually recommend people go to other trading sites when they want to play or learn the ropes. 

 

For those that have been fortunate and made some money on these investments, I congratulate you. However, this is not a pursuit of our firm, and we don’t encourage clients to chase them with their real savings. 

 

If investors find they need to play with small amounts of money, then still proceed with caution. It’s one thing to see a decline of a few hundred dollars or even a thousand dollars, but it is another to watch one single position lose $25,000 on a stock that was losing money well before the pandemic. 

 

I read an article the other day about a seasoned professional talking to his grandson about memes. The grandson had made thousands of dollars from some popular meme names over a couple of months and asked his grandfather if he ever made these types of returns. The grandfather responded no, but the reason he was still serving the same clients after 30 years was that he never subjected them to the risks and price swings that the grandson had seen over days and weeks

 

I read another news story where the person had no idea what the company did, whether they were good companies or not. He did not care about anything fundamental, and he just wanted the stock because it was cheap, and he could make a killing as it went over the moon.

 

Every market that I have seen since 1988 have had their share of investments that have flown through the roof. But any investor should consider taking profits after making a 100% gain on an asset with no fundamentals or earnings to justify these dramatic price increases. 

 

There have been different explanations to describe market conditions, but I like to consider times like now as  FOMO (Fear of Missing Out) moments.  

 

Everyone wants to make easy money, or and they are caught up in the hype. Everyone is running around giving investment advice, and everyone is a professional. The last time I saw this level of fever was the day trading bubble of the dot.com era, and that end unbelievably bad. It was great while it lasted, and almost all those spectacular returns were wiped out, and so was a significant portion of the principal as well.  

 

 

 

Recap of the first half of 2021:

 

I follow three key indexes in my research, the S&P 500, Nasdaq, and Russell 2000. These three reflect the market in many ways, and each has something to say about current conditions and trends. 

 

So far to date, the economy and the stock market are performing as I expected. I wrote about a 15% correction which we saw in March and April of 2021. However, I believed we would have an excellent first-half performance-wise, which has been the case through June. 

 

As I stated earlier, we are in positive territory regardless of the gyrations, inflation fears, and general lingering concerns about mutating Covid in the first six months. The S&P 500 is up about 13%, the Nasdaq is up about 9%, and the Russell 2000 is about 18%. 

 

Not too bad, considering the sky was falling just 60 days ago. I hope clients can see that I do not get concerned over unjustified gyrations and look for the opportunity to take advantage of these conditions when they present themselves. 

 

 

A new addition to the current research list above is the 10-year Treasury Bond. While I did not believe inflation would be a factor early in 2021, I think new data in May and June have displayed signs of inflation, and including the 10-year Treasury as part of our research is appropriate. 

 

We are still seeing a case of the S&P 500 being propped up by a small segment of stocks. As I discussed in my first half report, we would be looking at a negative return if we remove a handful of stocks from the S&P 500.    

 

 

As I had discussed back in December, I believed the first half of 2021 would be an excellent start to the year.  

 

Six months into 2021, I still see a lot of cash on the sidelines waiting for an opportunity to invest in the market, but changing conditions throughout the year are keeping them on the sidelines.

 

 

 

 

The second half of 2021

 

We will continue to see a divergence from stay-at-home stocks to recovery stocks. However, I believe the key to the second half of 2021 will be the impact of the recovery, inflation, taxes, and Washington, DC.

 

As I mentioned in the first half, investors will have to get used to high stock prices and, in turn, high valuations. Therefore, investments out of favor with full recovery will struggle and could see downward pressure. On the other hand, all signs point to domestic demand increasing even as the boost from stimulus money decreases. 

 

Recovery and expansion will continue throughout 2021 as various sectors recovery. We should see this kick into high gear by the last quarter of 2021 and possibly into the first quarter of 2022.   

 

We are still in the early stages of recovery in travel, retail, restaurants, consumer, and industrial, but the sectors are bouncing back strong. Some big names in these sectors are already up 20% or better in 2021, but are still well off pre-covid numbers.

 

Investors who are heavy into stay-at-home investments and hold some big-name technology companies may want to consider taking some profits and looking to other sectors with lower valuations and where their prices are still depressed. 

 

What could side-track recovery in the latter part of the year? I believe any level of underestimating the impact of inflation. 

 

In their latest earnings report, Costco CFO Richard Galanti discussed his version of inflation. “Chip shortages are impacting many items from an inflation standpoint, some items more than others. We will continue to see these pressures for the remainder of the year, and it could impact profits”. 

 

In the same article on Yahoo, CEOs interviewed stated they are aggressively raising prices to protect their profits from inflation. 

 

Bloomberg news put a better spin on inflation worries and rising prices. Bloomberg News states many companies are trying to candy coat what they see. They are trying to use very vague language, but it is still there. 

 

According to the article, “Proctor and Gamble are not raising prices, it is taking pricing. Unilever is very active with pricing. However, the best line was Lowes, “they are elevating our pricing ecosystem.” This one made me laugh.

 

So, if pricing increases because of some hard-to-expert factors, what happens when adding some other components into this equation? 

 

Employers struggle to get back to 100% productivity, but prices will continue to increase if they lack employees. We have already seen significant increases in grocery prices, fuel, home building, shipping, transportation costs, and other production increases. I have heard some of our farmers say grain prices are up 35% this year and could go higher. 

 

Employers will continue to battle for employees who are collecting generous state unemployment wages. Employers will have to increase the living wage for employees to $15.00 per hour or more significantly to win this battle. Even as we speak, employers are offering signing bonuses to get employees back to work, but at what price? 

 

To pay higher wages, companies will see it cut into earnings. Since Wall Street focuses on earnings, we could see a reduction in profits which usually leads to a decrease in stock prices, and in more severe cases, we could see layoffs in some sectors.

 

Do some ask how inflation could affect companies more than the average person? Higher wages are good for employees, but the money to pay higher salaries must come from somewhere.

 

According to the Federal Reserve, they have their finger on the trigger and will be able to manage any significant move in inflation, but if they are wrong or miss-step then the market could react negatively going into the close of 2021

 

 If inflation is not enough pressure on the market, taxes, and politics could be the next factor to push conditions.

 

Under proposed infrastructure programs, higher taxes on corporations are a critical component of funding the cost. 

 

Should we run into a perfect storm, there could be inflation on one front, higher taxes on another, and unfavorable business policies that could impact a companies’ bottom line and causing turbulent conditions to appear.   

 

While the second half of 2021 might feel like a grind, I still believe some sectors thrive and excel. 

 

Over the last few years, I have been bearish on global markets and financials. I still see a slow recovery, but I see improvement. It may be a little early to the party, so investors will need patience, which will be essential to success. 

 

Looking at current global conditions, quantitative data on consumers, and general research on our markets, I believe there will be a good performance from Europe and other developing countries, and China will be a wildcard. 

 

Emerging Markets will be a big question mark depending on each country’s ability to deal with Covid-19. India will be the country to watch the with their billion-person population and close proximation to the China region. 

 

 

Financials will need higher interest rates to get my attention, but increasing interest rates is a potential scenario I could see this year. The factor to watch here is the 10-year Treasury Bond. 

 

Currently, the 10-year Treasury Bond is sitting at 1.45%, and under certain conditions, I could see it reach 1.75% by the end of the year.  

 

Investors will have to clearly understand stay-at-home stocks that can transition to benefit in a recovery mode. 

 

For example, I discussed ZOOM in my first half out-look. It thrived during the pandemic; it has made itself an invaluable tool to businesses that could well outlast any pandemic. Since companies maintain at least a partially mobile workforce, Zoom could transition from one category to another.  

 

As I mentioned in December, I am not recommending Zoom in this report. I am pointing out stocks like these will not disappear overnight. I have provided businesses with a way to reduce travel and maintain a high level of communication with a company’s employees.   

 

Once again, the stock price may not become more volatile at these higher valuations as we transition, but it’s an example of the changing face of robust stocks.    

 

Mutual funds will not be immune to this process. Due diligence in 401k, IRAs, and other corporate retirement plans will be critical for 2021 for both employees and employer levels. 

 

Employees who have become more aggressive over the last few years may want to check the current holdings within their mutual funds and re-visit their investment tolerance and rebalancing strategies. 

 

On the other hand, employers need to strengthen their fiduciary capacity and due diligence policies to protect the plan and the employer’s liability. 

 

Mutual funds that held many of the stay-at-home stocks in their top holdings saw better returns than other funds, but that could change this year. 

 

There has been talk of value stocks as the next hot spot; I’m not sure if I have entirely made the turn to endorse value investments. 

 

During the past several months, I have been researching different sectors and individual investment positions. I have spoken to some of you about these recommendations, and where it is appropriate, we have recently started adding new positions to client accounts. Any additions should be completed before July 1st, 2021

In the first half of 2021, I could not rule out a minor correction of at least 15%, and I believed it would be short.  

 

Well, that happened, and it was short, only lasting two months. I see another minor correction of about 10% from late summer to early fall. Once again, strong earnings should make this a quick event. 

 

Early 2021 has been very active for competitive Mergers/Acquisitions (M/A) activity. I do not believe this will change in the second half of 2021. I think there will be some other media deals to get announced and some technology deals to get done ahead of any government hearings on the size of big tech. 

 

 

In this portfolio, I continue to believe there maybe two or three positions that potentially could fall into this takeover category. 

 

Precious metals like Gold, Silver, and Platinum are holding onto solid gains in the first half of 2021 and should hold their ground in the second half but may still lag cryptocurrency. 

 

Bitcoin has seen its price run-up to $63,000 in April but has pulled back into the high $30,000 range. Other tokens like Ether and Dogecoin continue to pull back following Bitcoin. 

 

In recent days, one government has said it will recognize Bitcoin as a currency should others do the same rebound could bring the whole sector back up to at least previous highs. Once again, understand what you are buying before getting into any investment.

 

I recommend speaking to a financial advisor and creating a financial blueprint for your program. I find that 9 out of 10 clients who walk into our office do not have any plan in place and even lack a proper understanding of everything they own.

 

If you’re considering a retirement package from your employer or changing employers, interview at least two advisors before making a final decision to rollover your funds.

 

Investors should understand how their advisor is compensated.  Are they a commissionable agent that only has access to one or two financial products and is receiving a 5% or 6% commission, or are they a Registered Investment Advisor who gets an advisory fee over a period of time to work with a client on an ongoing basis? The answer could have severe ramifications for your long-term plan.

 

I wish everyone a successful journey in the remainder of 2021 with discipline, education, and patience, and I hope your investments help you reach your personal financial goals. 

 

In December, I listed some holdings that I would have for 2021. 

 

For the second half of 2021, we will continue to hold onto Square, Qualcomm, General Electric, Advanced Micros Devices, Snow, Qorvo, American Water Works, Zoetis, LI Auto, Xpeng, Viacom, Fuelcell, Plug Power, and American Airlines. We replaced Fastly. 

 

During the first half, I made recommendations to increase American Airlines, Viacom, and Zoetis. 

 

For additions, for the second half, I want to add some value names that will round out positions favoring growth. Even though we already own some of these stocks, I am looking to discuss these new names as potential additions to our top holdings:

 

  • I like Iron Mountain (IRM). The Company stores records, primarily physical records and data backup media, and provides information management services in various locations throughout North America, Europe, Latin America, Asia Pacific, and Africa. The company provides storage and information management services to legal, financial, healthcare, insurance, life sciences, energy, business services, entertainment, and government organizations. The company’s other services include information destruction services, information governance, digital solutions, compliant records management and consulting services, and other ancillary services. The annual yield on the stock is about 5.5%  Current price $45.87

 

  • Abbvie (ABBV) is a research-based biopharmaceutical company. The company is engaged in the discovery, development, manufacture, and sale of various pharmaceutical products. The company has a promising pipeline, and its products are focused on treating conditions, such as chronic autoimmune diseases in rheumatology, gastroenterology, and dermatology; oncology, including blood cancers; virology, including hepatitis C virus (HCV) and human immunodeficiency virus (HIV); neurological disorders, such as Parkinson’s disease and multiple sclerosis; metabolic diseases, including thyroid disease and complications associated with cystic fibrosis, and other severe health conditions. I have been watching this company for over two years, and I like its balance sheet and the 4.5% annual yield. The position has moved well over the past three years, but its recent breakout is just beginning.  Current price $115.36

 

  • First Trust Water ETF (FIW) The index is designed to track the performance of small, mid, and large-capitalization companies that derive a substantial portion of their revenues from the potable water and wastewater industry. While this position is held in some portfolios, I believe several of the articles I have shared show water availability issues in the US and globally. While the annual yield is low at.48%, I like the top holdings, and it is an inexpensive way of owning the index.  Current price $83.67

 

 

 

I must stress any non-client looking at these positions is not a complete recommendation list or solicitation for these holdings. I can assure you they will change throughout the year. Please consult with a financial advisor or conduct due diligence before investing. 

 

I am keeping about three other positions in reserve, and I will discuss those with clients individually. 

 

Disclaimer: 

 

These are Aurora Strategic Advisors’ views (ASA) and should not be construed as investment advice. 

 

This material is not intended to be relied on as a forecast, research, or investment advice and not a recommendation, offer, or solicitation to buy or sell any securities or investment strategy. 

 

Conflict of Interest. 

 

ASA and our clients hold positions in several of the named stocks mention in this report, but we provide no investment advice to the companies named in the report. 

 

This report is based on a professional look ahead at the markets for our clients who have met with an investment advisor representative at our firm and had their particular investment needs and concerns analyzed.

 

ASA does not provide or give tax or legal advice.

 

Please consult with your financial advisor for further information. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.