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01 Jul 2021
3 min read

Stocks Climb to Records in Second Quarter Despite Inflation Fears

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Key Takeaways

  • Stocks on Wall Street advance during the second quarter boosted by highly positive sentiment
  • Inflation fears threaten to dent the upside swing as markets progress to the second half of 2021

US stocks finished the first half of 2021 with strong double-digit percentage gains as investors dived into shares from every sector, boosting stocks’ valuations to record highs. The increased amount of money pouring into the US equity market since the start of the year resulted in 34 record closings for the S&P500, which ended the first six months with a gain of 16.13%.

On the back of rapid economic recovery, the other two stock benchmarks also posted significant gains for the first two quarters. The Dow Jones Industrial Average ended the period higher by 14.16%, while the tech-focused Nasdaq Composite advanced 14.22%.

While the S&P500 is sitting at an all-time high reached on the last trading day of the quarter, the Nasdaq Composite slipped 0.17% and retreated from its record high achieved on Tuesday. The 30-stock Dow Jones index now floats less than 1% from its record in May. Both the S&P500 and the Dow Jones sealed their fifth straight quarter of gains, the longest streak since the nine-quarter winning stretch that lasted through 2017.

The highly positive market sentiment and the improved outlook for the US economy, however, are overshadowed by lingering inflation concerns. While the Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures price index, rose 3.9% in the year through May, separate sectors in the economy have surged a lot higher. Median home prices, for example, hit a record-breaking $350,000, or a rise of 24% in May, compared with the same month a year ago, the biggest home price increase on record.

Increased Peace of Mind for Investors

Strong growth expectations, ultra-low interest rates, and ample monetary support from the Fed, coupled with trillions of dollars in fiscal programs by the government are painting a rather optimistic but risky outlook for the overheating economy as the market moves to the second half of 2021.

Meanwhile, in Europe, the latest inflation report arrived below the European Central Bank’s target and assuaged investors that the central bank could be right about inflation being transitory. The harmonized index of consumer prices fell from its two-year high of 2% and landed at 1.9% in June.

While the short-term price reports may indicate inflation below target, the ECB expects price increases to reach as high as 2.5% by the end of the year. Having said that, ECB officials, including President Christine Lagarde, project next year’s inflation levels to stay at 1.4%.

The European market, similar to its Wall Street counterpart, pushed to new records throughout the first half of the year. The pan-European Stoxx Europe 600 registered its fifth month of gains after ending June higher by 1.4%. The region-wide benchmark index is up over 13% year-to-date. Expectations of a sharp economic recovery have propelled European bourses to a string of records so far in the year, despite a slight slowdown in June due to concerns over the Delta variant.

Over to cryptocurrencies, the nascent crypto market experienced one of its worst quarters ever. A ban over crypto trading and mining coming from China dented the sentiment in May. The bearish news knocked over 50% from bitcoin’s price, which managed to pare some of the losses but still concluded the second trimester lower by 41%. At one point, the digital currency erased all 2021 gains as it slipped 55% to a low of $28,800 in mid-June.

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