June was fine. Led by a resurgence in the relative performance of the mega cap tech stocks, both the S&P 500 and NASDAQ pushed into record territory as the month, quarter and first half of 2021 ended, with the Dow Industrials only a fraction off its all-time high. A fully diversified equity portfolio rose about 1% for the month, bringing the tally to a positive 6.5% for the quarter and more than 13% for 2021-to-date. There had been some mid-month angst over a somewhat disconcerting rise in several high-frequency inflation indicators. But those concerns ebbed nearly as quickly as they flowed, as did those concerns over the making of the legislative sausage around infrastructure.

What stock sectors are strongest in this bull market?

However, even though the secular bull market indeed continues alive and well, I didn’t find June’s record closes all that convincing. In my now near-40 years on Wall Street, I’ve found that every decade-long bull market has one or two stock sectors that make up its heart and soul. As long as those sectors stay in gear, it’s generally clear sailing. In the ‘80s it was health care. In the ‘90s, the techs. In the ‘00s, the banks. In the ‘10s, back to the techs. In the reversal off the ’20 low, the tech stocks started out on top but ceded leadership in ’21 to the banks, industrials and commodity-oriented - energy and materials. In my opinion, this latter group of three will be the ‘heart and soul’ of the bull market of the ‘20s. But in June they faded 2-3%, not a lot to be sure, but enough to temporarily arrest the bullish momentum.

What is the status of our current strategic portfolio positioning?

So, as we head into the lazy, hazy days of summer, here is a quick review of our current strategic portfolio positioning.

1. First and foremost, we are overweight to stocks (though hardly max-ed out) within balanced client portfolios.
2. Second, though we have increased our weighting within stocks to Developed International and Emerging Markets, we continue to overweight the U.S.
3. Third, within bonds we maintain our ‘short duration’ profile, reducing our longer-term exposures to the impact of eventually rising interest rates. We continue to have a modest allocation to the alternative asset categories of gold, real estate and infrastructure. Each has its own attractive outlook but together all serve to modestly hedge our overweight to stocks.

Now let’s go through the reasoning.

First and foremost, despite the temporary loss of leadership from those key stock groups, I am a resolute and unapologetic bull on the longer-term economic outlook and, by connection, to stock prices. The economy is strongly re-opening, backed by very accommodative monetary and fiscal policies that are not going to be reversed anytime soon. That’s fact.

Secondly, in my opinion, there is an inexorability to the passage of major infrastructure legislation, which will serve to catalyze a complete ‘re-boot’ of the U.S. – and perhaps the global – economy away from the indulgent and transactional modes of the latter part of the ‘2010s, one which was entirely dependent upon the highly consumptive upper few percent. If so, the focus of global growth will shift, over time, back towards a rebuilding of the economic center as highly productive investment in infrastructure, in all its forms and fashions, hard and soft*, provides a multiplier effect on economic growth.

Third, we are only in the early stages of a massive demographic wave of Millennials and Gen-Zers whose economic impact may well outdo those of my Baby Boom generation that drove nearly two decades (1982-2000) of accelerating economic activity, once we hit age 30 in massive numbers...and when, by the way, stocks quadrupled and then quadrupled again. Putting two and three together, combining true growth policies with teeming multitudes of eager participants can only, in my opinion, lead to huge wealth creation.

What will happen with interest rates?

As all of this plays out, interest rates should eventually move higher, not based on inflation but rather on a higher ‘natural’ rate of interest, determined by a higher, yet more productive, demand for available capital. Real assets - things you can touch, stomp on, take pictures of – should also benefit.

“Rain Delay” on the horizon…

But over the shorter term, I think it is reasonable to expect some kind of break in the action, or what I term ‘rain delay’. It is baseball season after all. Often in mid/late summer games, after a few innings the dark clouds appear bringing rain squalls, occasionally even severe squalls. The grounds crew races out to put the tarps on. All players and fans take cover and wait it out. Before too long, the sun reappears and the game recommences. The air is far drier and the outlook is as clear as it’s ever been.

What are some potential challenges moving forward?

Thinking about what could ‘go wrong’ and create enough market angst to create rain delay, here are the usual suspects –

1) More superficial inflationary data potentially an earlier Federal Reserve tightening,

2) A potential, albeit temporary** evaporation of legislative progress on infrastructure and

3) The delta Covid variant becoming enough pervasive to call into question the pace of the re-opening.

As noted above, even though overweight to stocks, we have plenty of room to add in case rain delay provides enough weakness to make it compelling to do so.

Very short-term - calendar Q2 earnings will begin to be reported the week of July 12 and they will be truly outstanding. I imagine corporate forecasts for the second half will also be outstanding. These could easily make July a terrific month for the major averages…and we will cheer it on. But if any such new record highs are tech-driven, without at least strong support from the banks, industrials and the commodity sectors, that’s all we’ll be doing – cheering it on.

*hard is what one thinks of – roads, bridges, highways, mass transit, ports, the electric and broadband grids. Soft are the people-intensive – education, child and elderly care among them. Considering that our biggest asset are our people, the soft has likely a much higher economic multiplier effect, though indeed much harder to quantify.

**even the 2017 tax cuts under a fully unified GOP ran into mid-summer legislative difficulties