A Relentless Bull Run

The US stock market ended June near all-time highs, building on its gains from earlier this year and further extending the remarkable, post-COVID market rally.

Tech led the charge as investors rotated away from cyclical-type names that were economic reopening beneficiaries, such as Industrials and Financials, back toward growth-oriented equities.

Our Perspective

Domestic equities rose for the fifth consecutive month, and the major indices are all up double digits thus far in the year.

The vaccine’s efficacy and subsequent mass distribution over the course of the first half of 2021 enabled many areas of the economy, that had previously been shut down, to reopen once and for all, and allowed consumers to go out and spend. This pent-up demand, coupled with stimulus support and low interest rates, helped fuel a strong bounce back in economic activity.

More recently, that bounce back became more of an expectation than an upside surprise, and investors are beginning to question the sustainability of the rally. Our view is that economic fundamentals are currently strong, but over the latter half of the year and into 2022, the economy is likely to slow, settling in back at a level near or slightly above its long-run steady state.

The Hot Housing Market

Home prices have been sharply rising this year, and last month, the National Association of Realtors published a fresh estimate, calculating that the US is short 5.5 million homes versus long-term historical levels.

Our Perspective

You just don’t happen into a 5.5 million home shortage; it takes years of underbuilding and shifting demographic trends, as well as housing obsolescence and low interest rates, to drive the imbalance.

The reaction to the Global Financial Crisis and subsequent housing bust resulted in far, far fewer homes being built to meet long-term demand. Additionally, Millennials, long held back by a variety of forces, are finally entering the housing market in full force.

Housing prices have been on a very strong run, but we think they still have some room to go. We believe there remain attractive opportunities in a variety of different areas of residential real estate.

For more, check out our recent blog post, A Closer Look at the Housing Market.

Diving Into Inflation

Inflation readings have been heating up this year, with recent readings hitting numbers not seen in years. The figures are grabbing attention, with one recent survey of fund managers calling inflation ‘the biggest tail risk’ in markets today.

Our Perspective

We think extreme views that suggest we are heading for hyperinflation are overblown. Near-term cyclical issues related to supply chain disruptions, stimulus support, commodity prices, and the unleashing of pent-up demand are all pressuring inflation higher, temporarily.

Yet, the variety of structural forces that have helped keep inflation in check for decades are all still (mostly) in place today. Globalization, automation, the ‘Amazon-effect’, and the declining bargaining power of labor are all still relevant today.

We believe inflationary pressures are higher today than pre-pandemic, but our outlook is very much incremental, and we do not expect inflation to be off to the races ahead.

For more, check out our recent blog post, Our View on Inflation.

Our View
Economic Cycle		Vaccines, economic re-openings, and fiscal stimulus has dramatically reaccelerated the pace of the recovery, substantially boosting economic activity and business/consumer confidence
Stock Market		The US stock market is well past pre-pandemic levels and at all-time highs; valuations are broadly elevated, which, alongside rising interest rates and inflation, pose significant risks
Bond Market		While still depressed by historical standards, interest rates are well above post-pandemic lows; corporate and municipal bond credit spreads have significantly tightened, and in some cases, are depressed beyond pre-pandemic levels
Foreign Exchange		While we believe the dollar may weaken longer-term, in the short-term, it is difficult to make the argument that currencies will swing significantly
Important Issues on the Radar		COVID-19: we believe the worst of the crisis is behind us, and the US appears to be on track for a once and for all economic re-opening, driven by vaccine efficacy and distribution
		Trade Tensions: relations are in structural decline as China focuses on becoming a self-sufficient, global hegemon, potentially impacting global trade and supply chains
		China Credit Cycle: China is further along in its economic recovery and its credit cycle appears to have peaked, potentially creating a capital markets headwind ahead
		Inflation vs. Deflation: the significant demand shock and remaining economic slack are disinflationary broadly, but certain bottlenecks may lead to some transitory inflation issues near-term

Indicates change

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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