Financial prognosticators had a tough job heading into 2021. All signs pointed toward an economy that would spring back to life as the world began to emerge from the pandemic. But questions surrounding the pace and effectiveness of vaccinations, the possibility of virus variants, and the global mishmash of reopening policies created a shroud of uncertainty around financial markets.
Now, at the midpoint of the year, the situation looks a little clearer — though nothing in the world of finance is ever entirely predictable. Here are financial experts' best guesses as to what investors can expect over the next six months, along with advice for positioning your portfolio to take advantage.
An economy on the rebound from Covid closures should continue to spell good news for stocks, says Will Rhind, founder and CEO of ETF firm GraniteShares. "We think the market still has room to go up this year, and the reason for that is that the factors that have been driving it are still in place," he says. "We still have accommodative monetary policy, low interest rates, fiscal stimulus, and an economy on the bounce-back, with consumer spending coming back very strong."
But investors shouldn't expect a smooth ride to greater stock-market gains. For one thing, it's important to remember that the stock market is forward-looking and much of the optimism surrounding a reopening economy is reflected in the current record-high prices: The S&P 500 is now up about 100% from its March 2020 lows.
As a result, investors are unlikely to see stocks pop on factors like better-than-expected corporate earnings results, says Ryan Detrick, chief market strategist at LPL Financial. "People are aware that this is going to be a great quarter for earnings, and stocks are at all-time highs," he recently told Grow. "Much of this growth has already been priced in."
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With much of the hard work of economic recovery already in the rearview mirror, investors would be wise to brace for some volatility in stock returns between now and the end of the year, Detrick says. "Second years of bull markets tend to be bullish, but also more choppy and frustrating," he says. "You need to be aware of your market history. The first year tends to be, 'How in the world are stocks going up?' Year two it's, 'Wow, things are good, but the optimism is priced in.' I wouldn't be surprised if that played out again."
That means you could see dips in your stock portfolio, or uneven performance from different swaths of the market. If you're invested for the long term, avoid making any wholesale changes to your portfolio based on these swings, says Brad McMillan, chief investment officer for Commonwealth Financial Network.
"You should always be rebalancing and sticking with your plan," McMillan says. "If you do a regular rebalance, you'll buy, say, some more emerging markets because they're less expensive and sell more U.S. equities because they're more expensive. It's the easiest and most bulletproof way to sell high and buy low."
Investors hate rising prices, and for good reason, says Rhind. "Inflation is far and away the biggest risk right now. It destroys wealth across the board."
A reopening economy has caused a surge in consumer demand, which has, in turn, caused a marked uptick in inflation. Investors have occasionally fretted to reporters about big inflation numbers, but mostly, they're taking Federal Reserve Chairman Jerome Powell at his word that high inflation figures are "transitory" and should soon subside.
That's likely the right idea, says McMillan. "Last year was so bad that the year-over-year numbers look worse than they are," he says. "We're still in the range of what we've seen over the past 5 to 10 years, but a lot of these headline numbers are base to peak." In other words, compared with last year's meager numbers, today's inflation levels look huge. But zoom out, and you'll see that prices aren't going as crazy as you think.
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A growing and healthy economy — one in which more people are getting hired and companies are working to meet accelerating consumer demand — should keep a lid on inflation in the second half of the year. But that doesn't mean you should forget about it entirely, especially heading into the fall, says Rhind.
"The market is currently accepting that inflation numbers are transitory, and we expect those high numbers to dissipate over time," he says. "But there's a risk that they're wrong and inflation is higher and more persistent than we think. Keep an eye on inflation over the next few months. If we continue to see high numbers in September and October, it'll be bad news."
If you're worried about inflation's effect on your portfolio, you can add a sleeve of investments that tend to perform well when inflation is on the rise. "Stocks can do well in an inflationary environment up until a point, but over a certain level, they can't pass inflationary costs on to customers," Rhind says. "Adding an ETF that invests in gold or commodities is a low-cost way to hedge against inflation in your portfolio."
If you've held bonds in your portfolio for the first half of the year, you're likely not a very happy camper. "This has been one of the worst starts to the year for fixed income ever," says Detrick. "The majority of your bonds are probably in negative territory."
A boost in interest rates — a move that central banks often employ during periods of economic expansion — could make bonds more attractive, but don't expect that to happen anytime soon, says McMillan. "There's a saying in investing: 'Don't fight the Fed,'" he says. "[Powell] is repeatedly saying that interest rates aren't headed anywhere in the foreseeable future, and investors should take him at his word."
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The bottom line: You won't earn much in the way of yields from bonds, and experts generally expect them to underperform stocks for the remainder of the year. But that doesn't mean you should ditch any bond allocation you may have as part of your investment strategy. Because bonds won't lose much during a major downturn, they can act as a ballast in your portfolio when things begin to sink.
That can keep you from panicking and making rash moves, such as selling your stocks, says Detrick. "If you have some exposure to bonds, their job is to help you stay in stocks," he says. "If there is a major drop, and you're tempted to sell, the safety that bonds can provide is so beneficial."
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