2nd Quarter 2021 Market Commentary: Made You Look
Data Source: Bloomberg
To read full commentary, click here.
June 2021 Highlights:
- For the month of June, global equities (MSCI All-Country World Index or ACWI) advanced 1.3%, but the advance was primarily driven by U.S. large caps with the S&P 500 returning +2.3%. MSCI Emerging Markets edged up 0.2% while the other regions were marginally down with MSCI Japan and Pacific Ex Japan down 0.3% and MSCI Europe down 1.4%.
- Over the course of the 2nd quarter, equity markets have been behaving like a game of ping pong with June seeing a reversal of leadership from May which saw a reversal from April. This reversal has also occurred intramonth with the end of the month reversing trends starting at the beginning.
- The proximate cause for June’s intramonth reversal was the mid-June Federal Reserve meeting which led to a sharp sell-off in economic cyclical stocks and commodities and a rally in the U.S. dollar that contributed to international markets underperforming the U.S. The COVID Delta variant spreading across Europe, Israel, and Asia also contributed to international weakness as several governments have restored lockdown provisions and limited travel.
- S. large cap growth dominated smaller caps and value as this month’s advance was led by a narrower group of stocks (the FAAMG megacap group). U.S. small caps (S&P 600) returned 0.3% lagging the 2.3% of the S&P 500 while S&P Pure Growth propelled 7.3% outperforming Pure Value which was down 3.8%.
- Technology, Energy, Consumer Discretionary, and Real Estate led major sectors while value- and dividend-focused sectors (Utilities, Industrials, Financials, and Materials) lagged this month as the former were hurt by a perceived shift in Fed policy. Energy stocks bucked the cyclical underperformance due to the rally in oil prices.
- The poor performance of Utilities and Cyclicals contributed to the underperformance of High Dividend and Value factor performance. High Quality benefited from the rally in growth stocks while Minimum Volatility benefited from lower interest rates (although Utilities underperformed). Since the May rebalance, MSCI Momentum factor has a lesser emphasis on growth stocks, causing it to perform near the broader market.
- Long maturity interest rates dropped in reaction to the June Fed meeting as the bond market is pricing in a scenario of lower growth and inflation over the longer term. The Bloomberg/Barclays US Aggregate Bond Index rose 0.7% as longer maturity government and corporate bonds benefited from the drop in interest rates.
- S. high yield continued to enjoy moderate gains as high yield spreads dropped to levels not seen since the mid-1990s. The Bloomberg/Barclays US High Yield Index returned 1.0% benefiting from tighter credit spreads; many high yield borrowers are energy companies which have benefited from the rally in oil prices. Foreign currency and emerging market debt underperformed mainly due to a stronger U.S. dollar.
- Within equity alternatives, Commodities performed well despite weakness in metals such as copper as oil prices rallied north of $70/barrel. Real estate benefited from further signs of post-pandemic recovery and lower interest rates while precious metals (primarily gold) dropped 7.0% following the Fed meeting suggesting tighter policy ahead.
- Whether a curveball or head fake, the Fed June meeting may have highlighted a risk that the reflation trade may have seen its better days with investors gravitating back towards the ‘sure’ thing of long duration deflation where growth becomes less plentiful, and inflation risks more transitory. It is difficult to read what expectations are being priced into equity and credit market valuations, but expectations appear high for the long duration winners (large cap growth and long maturity borrowers) versus the broader market.
To read full commentary, click here.
By: Benjamin Lavine