June 25, 2021
So far, 2021 has been a very good year for the S&P 500 Index. Despite last week’s pullback, the S&P has had consistent gains for most of June, reaching record highs. According to LPL, the current return for the Index is +11.71% for 2021 (YTD), which is one of the strongest performances ever seen during a bull market. There have been 26 new S&P 500 Index highs during the first five months of 2021. This is a rare event and can only be compared to 32 new highs (which occurred during the first five months in 1998). Relaxing pandemic regulations and accommodative fiscal and monetary policy are strong contributors to these record-breaking returns.
History has shown that new highs typically happen in clusters and can be persistent for many years. Consequently, since we have seen new highs since 2013, we could potentially have several more years of strong returns before this run is done. As long as interest rates stay very low, it is very possible this bull market could continue until at least 2023 (when interest rates are due to increase). Until then, the thesis goes that high P/E ratios will be supported by the low-interest rates.
As stocks could continue their ascent, consider value over growth based on historical trends and the data provided in the chart below. Strong GDP growth and rising rates have historically led to favorable performance for value stocks. Data indicates that periods of growth underperformance relative to value (by 20-30%) have often corresponded with higher interest rates. And, prospects of additional infrastructure spending and tax rate hikes may also bode well for value in the near term. However, over long-term horizons we don’t think growth is going away, so we continue to advocate for a balance of value and growth.
If the S&P 500 continues with new highs and interest rates stay stable, investors will likely see more record-breaking returns. Although the Fed may change their fiscal and monetary policy in the next few years, we must take advantage of the current low-interest-rate environment and the opportunities it brings. With significant indicators of economic growth, the second half of 2021 looks positive, albeit with more volatility.