July 06, 2021
Monthly Market Summary – June 2021
Economic data reports during June generally pointed to the continuing global economic recovery. Industrial production and service activity in the U.S. and Europe were better than expected and at the highest levels in years on rising demand as pandemic restrictions eased. Unemployment rates also declined. However, as demand increased during a time of supply shortages and logistics bottlenecks related to impacts of the pandemic, measures of consumer and producer inflation rose to unexpectedly high levels. For instance the U.S. consumer price index (CPI) rose 5% over the prior year, which was the biggest increase since 2008. The high inflation numbers pressured investor sentiment and led to periods of price volatility in financial markets. However, the Fed and various economists commented that the rise in inflation is transitory due to imbalances as economies adjust to the reopening. They point to the significant price hikes in “reopening sectors” such as airlines, rental cars, and hotels, and to the unusual demand for used cars caused by the dearth of new car production due to the shortage of semi-conductors. They contend that as supply normalizes price increases will ease.
Much of the performance of financial markets for June is explained by the reactions to comments by the Federal Reserve Open Market Committee (Fed) after its mid-month meeting. The Fed maintained its accommodative policies by leaving its interest rate target unchanged and committing to continue its monthly bond-buying program at the current rate. However, the projections by members for the future path of interest rates showed that members expect two interest rate hikes by the end of 2023 compared to no hikes in 2023 in the previous projection report. This hawkish change set off a brief sell-off in equity markets. (That sell-off was quickly reversed after the bipartisan agreement on an infrastructure bill was announced.) The hawkish change also led to an increase in short-term bond yields. The higher short-term yields provided a boost to the U.S. dollar which lowered returns for U.S. investors in foreign equity markets. Long-term bond yields declined in reaction to the Fed’s assurances that the increase in inflation is transitory. The lower long-term yields led to a rotation back to growth stocks and away from more cyclical value stocks.
The major U.S. equity market indices moved higher in June. The S&P 500 and Nasdaq indices both set multiple new record highs during the month. In a continuation of the back and forth this year in performance leadership between growth stocks and value stocks, growth stocks outperformed value stocks in June after value outperformed in May. The growth index for each market capitalization (cap) segment generated a positive return for the month compared to the negative return posted by the value index for each cap segment. As mentioned above, the decline in long-term bond yields provided a boost to growth stocks, particularly information technology stocks, but weighed on value stocks, particularly in the financials sector. The energy sector was another top performer across each market cap segment reflecting the strong demand for energy as economies reopen and the sharp rise in oil and natural gas prices. The materials sector was the worst performing sector across each market cap segment reflecting the decline in certain key industrials metals as supply increased.
The return for the MSCI EAFE index of developed international equities was -1.1% and the return for the MSCI Emerging Markets (EM) index was 0.2% on a U.S. dollar basis. The rising value of the U.S. dollar as short-term bond yields rose lowered the return on international and emerging markets equities for U.S. investors. The local currency return was 1.4% and 0.8% for the EAFE and EM indices respectively. Sector results were similar to results in the U.S. equity market. Therefore, the growth indices with a positive return outperformed the value indices which had negative returns. On a geographical basis, among international developed markets, the Far East region outperformed the Europe and Pacific ex Japan regions. Among emerging markets, Brazil and Russia had the highest returns helped by higher oil and grain prices. Indonesia was the performance laggard with a -6% return. Indonesia is one of the countries seeing an increase in the number of cases of the Delta variant of the COVID virus which has prompted new lockdowns and restrictions. Parts of China along with Thailand, Australia, New Zealand, and the United Kingdom are also under new restrictions due to the Delta variant.
U.S. bondmarket sector returns were mixed but the Bloomberg Barclays U.S. Aggregate Bond index ended the month with a positive return of 0.7%. As mentioned above, there was a divergence in bond yields after the Fed meeting with short-term yields moving up and long-term yields declining. Therefore, short-term bond indices posted small negative returns while long-term bond indices posted positive returns for the month. The 20+ year U.S. Treasury bond index gained almost 4% for the month. The municipal bond index had a small gain since a high level of cash flowing into the municipal bond sector pushed prices up. Corporate bonds generally had positive returns reflecting the improving economic conditions.
The Bloomberg Commodity index generated a positive return for June due entirely to the large gains for the energy related sub-indices. The price of West Texas Intermediate (WTI) crude oil rose to as high as $74 per barrel during the month, the highest price since 2018. Strong demand from the U.S. and Europe as economic activity picks-up coupled with tight supplies in the U.S. and Iran and production restraints by OPEC+ drove oil prices higher. Natural gas prices also rose sharply on strong demand due to the heat wave in much of the U.S. The industrial metals index declined as prices for copper dropped from recent record highs as China released some of its surplus inventory into the market. Both gold and silver dropped about 7% as demand for safe haven assets decreased. The decline in the agriculture sub-index was led by the drop in pork prices due to reduced demand from China since their herds have been rebuilt after the African swine flu outbreak there.
Vogel Consulting, LLC (Vogel) Tactical Recommendations
Since the global economy continues to improve as restrictions are eased and consumer behavior returns to pre-COVID levels due to progress with vaccination programs, we have a neutral view on growth relative to value. We prefer to have exposure to sectors benefiting from secular growth trends along with some exposure to cyclicality to participate as the economy improves. We favor equites over bonds with yields at historic lows. 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 market equities. We recommend an overweight in emerging markets equities due to expectations for higher economic growth rates than in developed countries and for the potential for a boost to returns from a declining U.S. dollar. 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 after the initial reopening rebound.
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.