Will record-setting investment in U.S. markets trigger volatility?

Capital flowing into U.S. equities may lead to volatility, but that is a normal part of a strong market. Capital is Pouring into the U.S. – Will Volatility Follow? In the first half of 2021, investors across the globe poured over $900 billion into U.S.-based mutual funds and exchange-traded funds (ETFs). It was a record-setting start for fund flows in the first six months, and the U.S. was by far the biggest beneficiary. In a world still beset by the pandemic and uneven responses and recoveries, the U.S. has been a refuge of sorts for global investors. Foreign investors alone added $712 billion into U.S. equities in 2020 and are expected to add another $200 billion this year.1 Similar trends are playing out in the bond markets. According to Bloomberg data, close to $16 trillion of global debt had a negative yield as of the end of July, which means investors would have to pay money to hold the bonds (assuming they held to maturity). At the end of 2019, there was $11 trillion in negative-yielding debt, which underscores how global central banks pushed rates lower in response to the pandemic. The picture in the United States looks different. U.S. Treasury bond yields are positive, and we expect them to move higher over time as the Federal Reserve eventually pulls back QE and as the economy continues to grow. When global investors are looking for positive yielding, safe debt, the U.S. is the place to go – approximately 70% of positive-yielding bonds from G10 countries were U.S. Treasuries.2 --------------------------------------------------------------- [Economic Indicators You Should Keep an Eye On!]( In addition to the yield curve, there are other key economic indicators that may be able to help you navigate the market! To help you keep an eye on these economic data releases, earnings reports, and other key economic factors, we are offering all readers a look into our just-released August 2021 Stock Market Outlook report. This report will provide you with our forecasts along with additional factors to consider: - Zacks Rank S&P 500 Sector Picks - Zacks view on equity markets - What produces 2021 optimism? - An update on the outlook for Covid-19 - Top stocks in top industries - Sell-side and buy-side consensus - And much more If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [IT’S FREE. Download the Just-Released August 2021 Stock Market Outlook3]( --------------------------------------------------------------- In my view, it makes sense why the U.S. is attractive to global investors at the current moment. The U.S. has plenty of vaccines, little-to-no economic restrictions related to the pandemic (at least not currently), and a booming economy with strong spending and growth. Many countries are still struggling to get the pandemic under control, which also means economic outlooks abroad are mixed. The abundance of capital within our borders and coming from abroad are welcome for U.S. markets and investors. The S&P 500 has not pulled back -5% since October 2020, over which time it is up over +35%. To find the last time the S&P 500 went so long without a healthy pullback, we’d have to look back to the stretch of June 2016 to February 2018. Zooming out even further, investors would find that in the last 50 years, the S&P 500 has gone a year without a 5% pullback only three times: twice in the ‘90s and 2017. In my view, 2021 will not be the fourth. Every investor likes to see the stock market trend nicely higher, but I also think it’s fair to observe some of the risks of unfettered strength. To be clear, when I say ‘risks’ I do not mean the stock market entering a volatile patch in the second half of the year or experiencing a correction of -10% or more. Just the opposite in fact – I think downside volatility would be a healthy, normal outcome. My concern with unfettered strength revolves more around investor complacency, which I see as investors getting too comfortable with a rising market and positive returns. The ‘good times’ often cause investors to ignore risk and invest too aggressively, while also forgetting that pullbacks are normal and natural. Combined, these mindsets increase the risk of making knee-jerk decisions when the stock market does eventually turn volatile. Complacent investors may see downside volatility as more worrisome than it actually is, which could lead to decision-making that runs counter to an investor’s long-term goals and adversely impacts returns. Bottom Line for Investors The U.S. economic recovery is indeed strong, and it is only a year old. There is also broad consensus that the U.S. will lead throughout 2021, with an estimated GDP growth rate of 6.9%. This is higher than Europe, Japan, the UK, and most other advanced and emerging economies. It makes sense that capital is flowing here, and the outcome has been good for U.S. markets and investors. I’m not saying that what goes up must come down. But as a student of market history, I can say that I strongly believe the recent, steady gains will eventually give way to more downside volatility. It would be a normal and natural outcome, and investors shouldn’t fear it if and when it does arrive. As of the end of July, the S&P 500 traded at 21.6x forward earnings, which is well above its five-year average of 18.4x. Given interest rates remain historically low, I’m comfortable with the higher valuation and remain optimistic about stocks in 2021 – but I also think it’s fair to expect greater volatility when the market trades at relatively high levels. In the meantime, I recommend keeping an eye on key economic data releases, earnings reports, and other key economic factors. Our [just-released August Stock Market Outlook report]( will give you insight into all of it! This report is packed with newly revised predictions that can help you base your next investment move on hard data. For example, you'll discover Zacks’ view on: - Zacks Rank S&P 500 Sector Picks - Zacks view on equity markets - What produces 2021 optimism? - An update on the outlook for Covid-19 - Top stocks in top industries - Sell-side and buy-side consensus - And much more If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [FREE Download – Zacks' August 2021 Stock Market Outlook Report4]( About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. 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