Have stocks reached their peak for the year 2021?  How can we expect our stocks to perform for the rest of 2021?  

Note what history shows us in the chart of S&P 500 stock market changes:  two or three years of positive change, followed by a year with a slight pullback.

Note:  the exception to this pattern is a major recession.  in 2000-2003 the stock market fell by a third, and in 2008 the stock market fell by just over a half).  Major recessions are usually due to political activity, such as actions taken by the President or Congress that severely disrupt the economy.

The U.S. economy typically grows by five to ten percent.  After two or three years of growth of the stock market by more than that rate, a “correction” will typically occur.  Investors realize that stocks are “overbought” – meaning they are paying more for stocks than they are actually worth – and begin to reduce what they are willing to pay for stocks.  

It is not uncommon for many investors to begin reducing their investments towards what they decide is possibly an end to a growth period.  Investors will “go to cash” to some extent, with the goal of waiting for “a slight pullback”.  When they believe the pullback has reached its minimum, and the prices of most stocks look more affordable, the cash they have will be used to pick the best stocks to invest in, keeping in mind any changes in the parts of the economy where the most growth can be anticipated.  

Selling off some of your stocks near their highest values and making new purchases near the bottom of the decline is a good way to update your portfolio to match changes in the economy.  

As always, the choices of what and when to sell and buy require research and careful analysis.  Not every choice will be a winner; but the goal remains the same:  to have more winners than losers.  

Market pullbacks can occur simply due to market forces, but as noted in previous columns, politics trumps economics.  An upward trend can be disrupted by government actions, and a decline in stock prices can be made worse by government actions.

Consider the political changes in the past year:  a pro-freedom, pro-economy President left the White house, and an explicitly pro-Socialist President took over.  Congress is controlled by pro-Socialist forces.  Clearly, the impact on the economy – peoples’ livelihood – will be negative, to some degree.  

The economy has had two good years, and now a change in the political environment.  Will that change speed a downturn, or delay it?  Will it increase the severity of the downturn, or reduce it?  The political goals that are being sought make the answer clear for all to see.■