Markets at record levels as individuals are aggressively buying equities

July 06, 2021

Thoughts

Equity markets continue to break out from the recent trading range, with the S&P 500® Index closing at a record high for the seventh-straight session on Friday. Falling interest rates have reestablished growth areas of the markets as leaders, with the Russell 1000 Growth Index up 7% over the past month compared with a decline of 1% for the Russell 1000 Value Index. The S&P 500 currently exceeds 13 of 15 Wall Street strategists’ 2021 year-end forecasts from last December, with a 16% return year-to-date. This represents the second-strongest first half of a year for the S&P 500 since 1998.
The steadily rising equity market has caused aggressive buying by retail investors, with $28 billion of inflows into equities and ETFs, the largest increase since tracking began in 2014 per Vanda Research. Individual investors continue to aggressively open brokerage accounts, with more than 10 million new accounts this year, roughly equal to the total from 2020. EPFR data shows that if the current pace of buying continues, flows in 2021 would exceed the previous 20 years combined. While individual investors are confident in the market, institutional investors are more nervous around inflation, a potential Fed policy error, and market valuations.
Equity momentum is being enhanced by aggressive individual investor buying.

Oil prices surged to the highest level since 2014 at $76 as OPEC+ concluded its meeting without a deal to increase supply as the UAE refused the deal. A deal had been expected to address the rebound in demand as the global economy reopens. If lack of a deal keeps prices high, Congress could act to push for supply and domestic production could rebound. Regardless of any potential deal, prices should remain elevated for several months given that inventories are at the lowest level since 2013.
Congress was busy over the holiday weekend working to coordinate the bipartisan infrastructure deal and the large reconciliation bill focused on Democrat priorities. Senate Majority Leader Schumer is targeting a domestic spending bill by the end of the month, though the size of the bill in a wide potential range at $2 to $6 trillion.
Earnings estimates for the second quarter continue to trend higher, with growth in the second quarter expected to be 60%, up from less than 50% expected at the beginning of the quarter, the largest quarterly boost on record. While the headline growth number is important, management commentary is likely to drive the direction of equity market reactions, including supply chain constraints, higher input costs, pricing power and productivity initiatives.

Economic data is sparse in the holiday-shortened week, highlighted by ISM non-manufacturing and PMI services and composite on Tuesday, JOLTS job openings on Wednesday, and consumer credit on Thursday. The minutes from the recent FOMC meeting will be released on Wednesday.

MFN-0533AO