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This year’s bad news hasn’t held the stock market back

We can always find a reason not to invest, but history shows staying invested has paid off over the long-term

Markets thoughts: the bad stuff

From inflation spikes to the delta variant to Chinese regulatory woes, this year hasn’t been short of “bad stuff” to unnerve investors. Yet, despite a long list of reasons to avoid investing, the market has continued to grind higher (even if it’s had some ups and downs along the way). The S&P 500 is up a very noteworthy +21% year-to-date.

In fact, this has been the strongest start to a year since the turn of the millennium and ranks sixth in the last 50 years. In the other five years with a 20%+ return through August, all ended the full year higher with an average return of +27% (and four of the five were positive in the final four months of the year — 1987 was the exception).

Adding to this, the S&P has notched 53 new all-time highs in 2021 (on track for the best year since 2017, which was the best since 1995), and it’s seen gains for seven straight months—the longest stretch since January 2018. We’ve only seen streaks this long 14 times during the last 60 years (and in nine of those 14, the gains continued).

That begs the question: What’s pushing markets higher if there’s so much to be worried about?

In one word: Earnings.

The rebound in corporate profits has been nothing short of extraordinary. Q2 alone saw S&P 500 earnings grow 90% over the prior year—the highest since 2009. And what’s all the more impressive is that 86% of companies beat already high expectations.

So far this year, such robust earnings growth has more than offset the -5% decline in valuations. And we believe stellar profits should continue to propel stocks higher from here. When all is said and done, 2021 looks on track to grow earnings by close to ~45%—the strongest in a decade.

At the same time, a handful of the latest market fears seems to be abating. For instance, some of the biggest factors driving inflation higher (read: auto prices) are now rolling over; vaccine penetration continues to improve (over 60% of Americans have now received at least one vaccine dose, up from ~50% in June); investors seem content that any changes in Federal Reserve policy will be well telegraphed; the labor market continues to heal (we’ll be looking to tomorrow’s jobs report for progress); and a host of broader growth indicators still signal strength (even if they’re ticking down from high levels).

That all said, we wouldn’t be surprised to see the pace of returns continue to moderate from here.

We’re marching right on from early to mid-cycle as genuine growth gets underway. To us, this means continuing to favor stocks over bonds, and balancing cyclical areas of the market (that benefit from rising rates and the ongoing recovery) with quality growth areas (such as technology and healthcare). And as interest rates rise, we’re being mindful about our exposure to interest-rate sensitive areas of fixed income, and where appropriate, fixing rates on floating rate liabilities.

And when the next something comes along to incite nerves about investing, remember there’s always going to be a reason. But history has shown us (and this year is case in point), that staying invested has paid off over the long term.


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