Last week we closed the books for the first half of 2021, so of course we’re thinking about who will be the market leaders in the next six months. Inflation will play a small role, but I expect market dynamics, massive infrastructure bills and consumer spending to be the main drivers.

Inflation is a temporary rash

Market participants were (and are) concerned about the long-term potential for inflation and its impact on the stock market. Two things happened that convinced me that inflation is only temporary. First, the Fed, led by Chairman Jerome Powell, has repeatedly said that any spike in inflation is likely to be temporary. Several commodities rose higher, which had many doubts about the Fed.

Second, the bond market has not bought the history of higher inflation. The yields on the 10-year bond nearly doubled from 0.90% to around 1.75% in three short months. That pace could be seen as a blast, but honestly the values ​​we’re talking about are negligible. (In 2018, the 10-year bond was around 3%.)

These stocks will be market leaders

The markets moved significantly higher in the first two quarters of the year and the indicators continue to point upwards. There was volatility here and there, but those few bumps were great opportunities to get in. The SPX 500, Industrials, Nasdaq, and Russell 2K were all up double-digit for the year. This is really impressive as it follows their strong comeback in 2020.

If the infrastructure bill is passed in Washington, industrial companies like Caterpillar, Deere, and Vulcan Materials will benefit. Defense and aerospace names could get a boost too, so keep your eyes on those names.

Much (but not all) of current inflation can be traced back to pent-up consumer demand for goods and services. I expect retail, restaurants, hospitality and travel businesses will also do well when we unleash our purchasing power in the summer.

Regardless of the optimistic outlook for the second half of 2021, it is always advisable to take it slow and easy as a trader. The markets can make some nice gains, but they can also be a source of terrible pain. Practice good risk management to ensure your portfolio continues to have a strong year. Leave your ego at the door, buy index puts for protection, and always have plenty of cash on hand.

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