September 08, 2021
Monthly Market Summary – August 2021
August was another positive month for equity markets. Various U.S. and international equity indices reached new record highs during the month. The equity market gains were propelled by strong earnings and job market reports as well as central banks reaffirming that there will be no interest rate hikes in the near term. After the August gains, the major U.S. and developed international equity indices we track, except the Russell 2000 Growth, have double-digit returns for the first eight months of the year as shown below. Bond yields moved in a tight range in reaction to news but ended the month slightly higher so most sectors of the bond market posted small negative returns. Commodity prices were mixed. Prices for lumber continued to drop from multi-year highs reached earlier in the year. Oil prices were also lower. However, robust demand and tight supplies continue to move prices up sharply for certain commodities such as aluminum.
In economic news, while most data continue to show strong economic growth, certain data have been moderating from recent peaks. The impact of the increase in infections of the Delta variant of the COVID-19 virus, shortages, and inflation are the primarily reasons for the slowdown in certain data. Perhaps the most significant change is the slowdown in services activity in China. The most recent purchasing managers’ index (PMI) report on services activity from China came in at 47.5 and dropped into contraction territory (under 50) for the first time since February 2020. Japan’s services sector declined further into contraction territory at 43.5. The new wave of COVID infections and related shutdowns and restrictions is blamed for the declines in China and Japan. Germany reported an unexpected decline in manufacturing output due to supply bottlenecks. The U.S. manufacturing PMI declined to a still strong 61.2, but this was the lowest reading in four months. The services PMI was down to 55.2, the lowest in eight months. Both reports were lower due to supply chain issues and labor shortages. Businesses report a severe worker shortage in the U.S. There are 1.3 jobs open for each unemployed person and the number of new jobless claims fell to 348,000 in mid-month, which was a new low since the COVID-19 outbreak. The worker shortage is pushing wages up and increasing production costs. U.S. retail sales declined 1.1% in July. The decline was mostly due to lower auto sales which have stalled as consumers balk at the skyrocketing prices for used cars. Edmunds reports that the average price for a used car was up 21% from a year ago in the second quarter.
The major U.S. equity market index returns were mostly positive for August. The Dow Jones Industrial Average, the S&P 500 index, and the Nasdaq Composite index each set new record highs during the month. Larger company stocks outperformed smaller company stocks. Growth stocks outperformed value stocks in the large and mid-capitalization (cap) indices while value outperformed growth in the small-cap index. Each of the 11 industry sectors posted a positive return in the large, mid, and small-cap indices with one exception. The energy sector in the S&P 500 index had a negative return. Just as in the prior month, the energy sector was the poorest performing sector in each of the three market cap indices reflecting concerns about future demand due to COVID impacts and some rotation by investors into higher growth sectors. The financials sector had the highest return in each of the three market cap categories. Information technology and communication services were also top performers in each market cap category.
Global equity market returns were mostly positive for August as signs of economic growth and robust earnings reports largely offset the impacts of the increasing number of cases of the Delta variant and related shutdown and restrictions. The STOXX 600 Europe index hit new records highs during the month. The return for the MSCI EAFE index of developed international equities was 1.8% on a U.S. dollar basis but was higher on a local currency basis since the U.S. dollar rose against the euro, sterling, and yen. Growth stocks outperformed value stocks in the EAFE index as the information technology and healthcare sectors posted the highest returns among the 11 sectors. On a country basis, the Netherlands and Portugal were the top performers while Canada and the United Kingdom lagged, but still posted a positive return. The MSCI Emerging Markets (EM) index outperformed the EAFE index with a 2.6% return. Sector results were different for the EM index since value outperformed growth and the utilities and financials sectors had the top returns. On a country basis, India and the Philippines with double-digit gains were the performance leaders as these countries rebounded from COVID impacts. Brazil and Korea were the performance laggards with a negative return. The index of Chinese stocks ended with a flat return after declining for much of the month. The Chinese equity market continues to be pressured by the impact of regulatory actions by the Chinese government related to the “prosperity for all” initiative. These new regulatory restrictions have hurt companies in the technology, on line gaming, healthcare, and education industries in particular.
U.S. bond market sector returns were mostly negative for August as bond yields inched up. The 10-year Treasury bond yield was 1.30% at the end of August up from 1.25% at the end of July. High yield bonds outperformed investment grade corporate, government, mortgage-backed, and municipal bonds. The corporate high yield index and the shortest maturity Treasury and corporate bond sectors were the only sectors to post a positive return.
The Bloomberg Commodity index generated a return of -0.3% for the month. The industrial metals sub-index had the highest return among the commodity indices we track but the gain was modest at 0.3%. Prices for some metals such as copper and platinum have moderated but prices for others including aluminum continue to rise due to strong demand and tight supplies. The precious metals sub-index had a sizeable decline due to the large drop in the price of silver. The petroleum sub-index had the largest negative return, down over 4%. However, the price of natural gas rose sharply at month-end due in large part to weather in the U.S. including Hurricane Ida.
Vogel Consulting, LLC (Vogel) Tactical Recommendations
We favor equites over bonds with yields at historic lows. We continue to prefer to have exposure to sectors benefiting from secular growth trends along with some exposure to cyclicality to participate as the economy improves. Even though the outlook for economic and corporate earnings growth appears to be positive, valuations are high. Therefore, within the equity allocation, we recommend an equal weight position relative to long-term targets to U.S. large-cap, mid-cap, and small-cap stocks, as well as to developed international and emerging market equities. Within our fixed income recommendation, we continue to favor short to intermediate maturities. We continue to recommend an underweight allocation to hedge funds. We recommend keeping at least a year of cash reserves as we expect bouts of market volatility throughout the year since expectations are high and there is still a high level of uncertainty about what growth and inflation will look like as economies deal with COVID impacts as well as the impacts of the release of pent-up demand and supply shortages.
The statistical information contained in this commentary has been compiled from publicly available sources and is presented to you for your review and for discussion purposes only. The information contained in this commentary represents the opinion of the author(s) as of its date and is subject to change at any time due to market or economic conditions. These comments do not constitute a recommendation to purchase, sell or hold any security, and should not be construed as investment advice or to predict future performance. Past performance does not guarantee future results.
The statistical information contained in this commentary was derived from sources that Vogel Consulting, LLC believes are reliable, and such information has not been independently verified by Vogel. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of the Russell Investment Group. An index is not managed and is unavailable for direct investment.