August 07, 2021

Monthly Market Summary – July 2021

Although markets fluctuated on changing news about corporate earnings, economic activity, and the spreading Delta variant of the coronavirus, financial market performance was mostly positive for July.  Prices for stocks of larger size companies continued to march higher.  The S&P 500 index set seven new closing highs during the month.  Stock prices were boosted by better than expected earnings reports from a majority of companies that reported second quarter results during the month and generally strong economic data.  However, U.S. smaller-size company stocks and certain international markets, particularly in Asia, sold-off reflecting worries about slowing growth as COVID cases pick-up again.  Chinese equities were the worst performers for the month.  Implementation of stricter antimonopoly and cybersecurity regulations by the Chinese government roiled Chinese technology, financial, and education stocks which dragged down the emerging markets index.   The rally in the bond market continued in July on strong demand as concerns increased about the pace of future economic growth given the spread of the Delta variant.  U.S. Treasury bond yields declined as prices rose.  The yield on the benchmark 10-year Treasury bond dropped to 1.25% at the end of July.  Prices for most commodities, including energy and metals, rose during the month as demand remains robust and supplies tight.

In economic news in the U.S., retail sales were up more than expected, industrial production was up, and new and existing home sales rose.  Manufacturing activity remained at a historically high level, but moderated slightly, mostly due to supply shortages.  In Europe, unemployment declined and the composite purchasing managers’ index rose to a 15-year high as countries there rebounded as COVID restrictions eased.  Manufacturing and service sector activity slowed modestly in China causing the government to ease a bank reserve requirement.  However, investors focused on inflation data.  Inflation was higher than expected in the U.S. and Europe.  In the U.S., the consumer price index report (CPI) showed a jump of 5.4% year-over year in June and the producer price index rose 7.3% from a year earlier.  In the United Kingdom, the CPI rose 2.3%.  Central bank officials continue to explain their view that the price increases are temporary caused by supply/demand imbalances as economies adjust to reopening after the COVID shutdowns.

COVID news also returned as a major topic of consideration.  The news was mixed.  On the positive side, the United Kingdom lifted all lockdowns including travel restrictions.  However, France, the Netherlands, Japan, and China, among others, implemented new restrictions to prevent the spread of the Delta variant.

The major U.S. equity market index returns were mixed for the month reflecting the signs of economic recovery and robust earnings reports but also higher inflation and worries about the impact of the increasing number of cases of the Delta variant.  The S&P 500 was the performance leader with a 2.4% return.  That index has posted a positive return for six consecutive months.  The mid-capitalization (cap) stock index had a small positive return but the small-cap index declined over 3% as future economic growth concerns sparked volatility in small company stocks.  Growth stocks outperformed value stocks in the S&P 500 and Russell MidCap indices.  There was little difference in the return for the growth and value components of the Russell 2000 index of small-cap stocks.  The energy sector was the poorest performing sector with a negative return in each of the three market cap indices most likely due to some profit taking as investors rotated back to sectors more exposed to secular growth themes.  Other than that, sector performance trends varied widely by market cap category.  For example, healthcare was the top performer in the S&P 500 but had the second lowest return among sectors in the Russell 2000 index.

The return for the MSCI EAFE index of developed international equities was 0.8% and the return for the MSCI Emerging Markets (EM) index was -6.7% on a U.S. dollar basis.  Currency impacts had a small positive impact on the return for the EAFE index and a small negative impact on the return for the EM index.   The local currency returns were 0.4% and -6.1% for the EAFE and EM indices respectively.  Growth stocks outperformed value stocks in the EAFE index while value outperformed growth in the EM index.  Among developed international markets, the European region was the top performer boosted by the accelerating pace of the rebound in business and social activity as more restrictions have been lifted with unrestricted travel being a key.   The Pacific ex Japan region was the performance laggard since the Delta variant restrictions in several countries dented consumer and investor confidence.  Several emerging market country indices had a negative return for the month with political issues a main reason for the declines. However, the biggest news among emerging markets was the sharp drop of almost 14% for the China index due to the increasing regulatory crackdown on certain industries and worries about what industries/companies will be the next target for regulatory changes.

Returns were positive across all sectors of the U.S. bond market in July.  The Bloomberg Barclays U.S. Aggregate Bond index posted a return of 1.1% for the month.  Long-term Treasury bond indices had the best returns.  Credit indices were also top performers reflecting the strong corporate earnings reports.  Municipal bond prices rose reflecting strong demand.

The Bloomberg Commodity index generated a return of 1.8% for the month.  The industrial metals sub-index had the highest return among the commodity indices we track gaining almost 4% for the period due to strong demand as economic activity around the world continues to rebound.  The energy sub-index also posted a return near 4% due mostly to the rise in natural gas prices from strong foreign demand, hot weather in the U.S., and limited production.  Gold was up about 3.5% on safe haven demand due to the increasing spread of the Delta variant.

Vogel Consulting, LLC (Vogel) Tactical Recommendations

A change was made to the tactical asset allocation recommendations.  The recommendation for emerging markets equites was reduced to equal weight from overweight.  The prior overweight to emerging markets was based largely on a forecast for a declining U.S. dollar.  The dollar has instead been mostly trading in a range due to shifting impacts of COVID and its variants on various economies around the world and on investor sentiment.  We expect these conditions to continue into 2022 so the boost to returns from currency is likely to be less than we anticipated earlier in the year.

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.