Key Market Drivers

The growth rate of the U.S. economy likely peaked with the second-quarter GDP result, but growth is expected to remain at historically high levels in the second half of 2021. High savings rates and consistent payrolls gains will drive consumer spending while business spending should pick up the mantle from government spending as companies strive to catch up with demand and improve workforce productivity.

Europe and Japan are just beginning to emerge from their pandemic-induced recessions as vaccination rates proliferate although the delta variant of  COVID-19 may delay some economic reopenings and could perhaps lead to renewed restrictions on select activities. Several emerging markets economies continue to struggle with high infection, hospitalization, and mortality rates that may be offsetting to an extent their leverage to stronger global growth.

It appears China may be willing to sacrifice a certain amount of growth to assert greater government control over some sectors of the economy. With the post-pandemic export boom peaking and industrial production slowing as countries work to localize supply chains, expect Chinese GDP growth to slow to approximately 5% annually by year-end.

Our Perspective

Equity Markets

  • A second-quarter earnings reporting season that was notably better than the already lofty expectations combined with lower rates was a powerful driver of equity prices in July. More difficult quarterly earnings comparisons in coming quarters and the expected increase in interest rates should lead to some consolidation to the virtually straight up run seen in U.S. large-cap equity prices year-to-date.
  • Concern around the delta variant of COVID-19 slowing the cyclical recovery has hurt the small and mid-cap equity asset classes in the U.S. Vaccine effectiveness and strong earnings should allow this sector of the equity market to resume its advance.
  • Developed international equities are more cyclically sensitive than their U.S. counterparts and stand to benefit on a relative basis from the delayed economic recovery in these economies as higher vaccination rates neutralize the most recent infection wave.
  • The Chinese crackdown on technology and for-profit education companies, as well as developing doubts around the magnitude of the global recovery have pressured emerging markets equities. If the Chinese moves to reassert governmental authority are near an end, the economic and earnings growth fundamentals across these economies should attract investor dollars into these markets.

Bond Markets

  • The outlook for a gradual slowdown in Fed purchases with some persistent inflation pressures emanating from the labor market should exert some upward pressure on intermediate-term interest rates through the remainder of the year. The relative attractiveness of U.S. yields compared to those in other developed countries should provide enough demand to prevent yields from spiking sharply higher.
  • The strong year-to-date relative performance of municipal bonds has brought the ratio of municipal to treasury yields down to all time lows. Any general upward pressure on yields could negatively impact the tax-exempt market at a greater rate than it would taxable bonds.
  • U.S. high-yield bonds appear somewhat expensive at near record low spreads to like maturity treasuries. Emerging market debt, which has a higher average bond rating issued by economies that are just beginning their delayed rebounds, may be a more attractive alternative over the coming months.

Monetary Policies/Currencies

  • The Fed should provide preliminary guidance on their plans to wind down asset purchases as soon as the Jackson Hole symposium at the end of the month, but the tapering of purchases should not begin until early next year with rates remaining near the zero bound until 2023.
  • Other developed market central banks (Bank of England, European Central Bank, Bank of Japan) should remain accommodative even longer than the Fed, as the economic recoveries have been slower and of a lower magnitude with inflationary pressures less pronounced.
  • The People’s Bank of China has been sending somewhat conflicting signals as they attempt to rein in excesses in certain parts of the economy while continuing to be loose enough to avoid unnecessarily derailing the economic recovery/expansion.
  • The continued dovish bent of the Fed and the anticipated partial catch up of other developed economies to the U.S. should keep the trade weighted dollar in a tight trading range after having appreciated somewhat so far this year.


  • Crude oil inventories continue to be steadily drawn down as the global economy expands, but supply appears to be on the verge of responding to higher year-to-date prices. OPEC+ Russia recently announced supply increases and U.S. shale producers should begin to incrementally ramp up production while attempting to maintain an element of capital discipline. This balance between supply and demand should keep crude oil prices near current levels.
  • A spike in the inflation rate and the Fed’s insistence on its transitory nature has helped push up the price of gold and other inflation hedges. As inflation rates decline in the second half of the year and the Fed gets closer to beginning the monetary tightening process, gold prices will have difficulty moving meaningfully higher.

What This Means for Investors

Above-average economic growth with monetary policy remaining largely accommodative over at least the next six months should favor equities over core fixed income assets. Interest rates and inflation will not be meaningful market headwinds through year-end, although the progression of the delta variant of COVID-19 is a somewhat unexpected development that could lead to a late summer/early fall equity market pullback. Low rates on short and intermediate-term fixed-income securities should prevent a more severe decline as corporate earnings continue to grow.

For more insights, contact a Cerity Partners advisor.

Please read important disclosures here.